Far East International Observation: European Central Bank Keeps Three Key Interest Rates Unchanged, Inflationary Pressure Boosts Rate Hike Expectations

On March 19, the European Central Bank held a monetary policy meeting, announcing that the deposit facility rate, main refinancing rate, and marginal lending rate would remain at 2.00%, 2.15%, and 2.40%, respectively. This is the sixth time the ECB has kept interest rates unchanged. In the latest economic forecast, the ECB raised its inflation expectations for the next three years across the board, while lowering its economic growth forecasts for this year and next: inflation expectations for 2026, 2027, and 2028 were adjusted to 2.6%, 2%, and 2.1%, respectively, all higher than previous forecasts of 1.9%, 1.8%, and 2.0%. Meanwhile, GDP growth rate expectations for 2026, 2027, and 2028 were set at 0.9%, 1.3%, and 1.4%, compared to previous forecasts of 1.2%, 1.4%, and 1.4%.

Far East Commentary:

The ECB maintained its three key interest rates unchanged, in line with market expectations. The background is that the eurozone economy is experiencing a moderate recovery, and February’s inflation rate has already fallen within the policy target. Due to geopolitical conflicts causing significant inflationary pressures, the likelihood of future monetary policy turning to rate hikes has increased markedly. Specifically, conflicts in the Middle East have triggered a surge in energy prices, with supply shocks posing risks of transmission to core inflation and wages. The ECB has significantly raised its inflation forecasts for the next three years. Meanwhile, Lagarde explicitly stated that the ECB will “unconditionally ensure the medium-term 2% inflation target,” and several other central bank officials have signaled hawkish stances, further reinforcing market expectations of tightening monetary policy. The duration of ongoing conflicts and the economic growth outlook of the eurozone are also expected to influence the pace and magnitude of future rate hikes.