Europe | War fuels a hawkish outlook

Summary

The ECB kept interest rates unchanged, with the deposit rate at 2.00%. The war in the Middle East and the energy shock define current policy. Inflation is revised upwards and growth downwards for 2026, tilting the outlook towards a more hawkish stance focused on second-round effects.

Key points

• Key points:
• The baseline scenario uses market-implied oil prices, projecting headline inflation at 2.6% and economic growth at 0.9% for 2026.
• Adverse and severe scenarios assume no policy response and differ mainly in persistence, with prices rising sharply and remaining elevated for longer due to the energy shock.
• Inflation excluding energy and food increased to 2.4% in February, reflecting goods inflation edging up to 0.7% and services inflation moving up to 3.4%.
• Bank lending to firms grew by 2.8% on a yearly basis in January, while mortgage lending grew by 3.0%, with credit standards remaining unchanged from December.

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