The war in the Middle East is creating inflationary pressures, and the decision to raise interest rates is appropriate for a range of scenarios describing how the disruption could evolve and affect the medium-term outlook for the euro area.
The European Central Bank (ECB) today implemented its first interest rate hike since September 2024, due to the severe inflationary pressures manifesting in the economy. As part of its commitment to setting monetary policy aimed at ensuring that inflation stabilizes at the 2% target over the medium term, the ECB's Governing Council today decided to raise the three key ECB interest rates by 25 basis points. The war in the Middle East is creating inflationary pressures, and the decision to raise interest rates is appropriate for a range of scenarios describing how the disruption could evolve and affect the medium-term outlook for the euro area.
Higher inflation
According to the baseline scenario of the new Eurosystem staff projections, headline inflation is expected to average 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Regarding inflation excluding energy and food, the baseline scenario projects it will average 2.5% in 2026 and 2027 and 2.2% in 2028. Compared to the March edition, experts have revised upward the baseline projection for inflation for 2026 and 2027 due to a more upward trajectory in energy prices, which—to some extent—is expected to pass through to food, goods, and services inflation. According to the baseline scenario, economic growth is expected to average 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. This is a downward revision for 2026 and 2027, reflecting the stronger impact of the war on commodity markets, real incomes, and confidence.
Uncertain outlook
The outlook remains uncertain, with upside risks to inflation and downside risks to economic growth. The full impact of the war on inflation and growth in the medium term will depend on the intensity and duration of the energy price disruption, as well as the extent of its indirect and second-round effects. This uncertainty is also reflected in a wide range of outcomes for inflation and growth in the updated illustrative scenarios prepared by Eurosystem staff. These scenarios will be published alongside the expert projections on the ECB website.
With today's decision, the Governing Council remains well-positioned to address the uncertainty caused by the war. It will monitor the situation carefully, following a data-dependent approach and taking decisions on a meeting-by-meeting basis to determine the appropriate direction of monetary policy. Specifically, the Governing Council's interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, in light of incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council does not pre-commit to a specific rate path.
Key ECB interest rates
The Governing Council decided to increase the three key ECB interest rates by 25 basis points. Consequently, the interest rates on the deposit facility, the main refinancing operations, and the marginal lending facility will increase to 2.25%, 2.40%, and 2.65% respectively, effective from June 17, 2026.
Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP)
The APP and PEPP portfolios are declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities. Furthermore, the Transmission Protection Instrument (TPI) is available to counter unwanted, disorderly market developments that pose a serious threat to the transmission of monetary policy across all euro area countries, thereby allowing the Governing Council to more effectively fulfill its mandate for price stability.
www.bankingnews.gr
Σχόλια αναγνωστών