“The ECB signalled it would follow a data-dependent, meeting-by-meeting approach to determine its monetary policy. While the balance of risks has changed significantly in recent weeks, with markets pricing in rate hikes this year, the ECB has opted to look past the energy shock for now, retaining flexibility as it assesses the scale of the impact caused by price rises.
“Today’s meeting was accompanied by a new set of projections which saw an upward revision to the inflation forecast. However, while headline inflation was revised sharply upward, projections for core inflation remained broadly unchanged for 2026, suggesting the ECB does not anticipate significant second round effects from the higher energy prices.
“Recent volatility in energy markets means the Governing Council is likely to place less weight on the projections and more on the duration of disruption to energy supplies. Unlike in 2022, the eurozone is somewhat better positioned to absorb rapidly rising energy prices, as lower energy intensity has reduced its overall vulnerability to swings in oil and gas prices.
"Looking ahead, the statement pushed back slightly against more hawkish expectations by investors, with the ECB striking a more dovish tone. The eurozone entered this energy shock with inflation slightly undershooting, so the ECB appears ready to tolerate an overshoot, provided household inflation and wage expectations remain well anchored. We expect the Governing Council to keep rates on hold until the end of the year.”
