Faced with the energy shock, the ECB has no plans to raise interest rates: What kind of miraculous turnaround are they betting on?
2026-03-11 15:39:22
On Wednesday, March 11, international oil prices had fallen significantly from their recent highs above $100. Brent crude futures hovered around $87 per barrel in pre-European trading, down about 3 percentage points from their recent highs. The Eurozone's harmonized index of consumer prices rose to 1.9% year-on-year in February, up 0.2 percentage points from January, while core inflation was 2.4%. France's inflation rate rose to 1.0% during the same period, remaining relatively low.
Meanwhile, the European Central Bank (ECB) is set to hold its monetary policy meeting next week, and markets are closely watching how policymakers will address the energy cost pressures and economic slowdown risks stemming from geopolitical uncertainties. The latest policy signals suggest that the ECB is inclined to maintain a wait-and-see approach, avoiding overreacting to short-term shocks. This provides traders with a crucial reference point for assessing the pricing path of Eurozone assets.
The conflict with Iran has lasted for about two weeks. Initially, market concerns about potential supply disruptions in the Strait of Hormuz drove oil prices up rapidly, but the gains quickly narrowed as signs of diplomatic de-escalation emerged. Currently, Brent crude is stable around $87 per barrel, while WTI crude fluctuates around $83 per barrel. This dynamic reflects the short-term transmission characteristics of geopolitical risks: rising energy prices can increase overall price levels through cost-push mechanisms, while simultaneously suppressing business investment and consumer spending, leading to weakened economic growth momentum. Some analysts believe that a $10 increase in oil prices per barrel could contribute about 0.3 to 0.5 percentage points to the Eurozone's annualized inflation rate, but if the conflict subsides quickly, this impact will be mainly limited to the short term. In contrast, persistent supply disruptions will amplify the second-round effects, especially given that service sector inflation has already reached 3.4%. The European Central Bank's policymakers have clearly stated that the current decline in oil prices provides breathing room for policy adjustments, but uncertainty remains, and any persistent rise in energy prices could alter the trajectory of inflation expectations.
The table above clearly shows that while Eurozone inflation has rebounded slightly, France, as a key member state, remains under pressure at low levels, providing a buffer for overall regional policy. The downward trend in energy prices has further mitigated immediate inflation risks, but traders should continue to monitor weekly inventory data and geopolitical developments to determine whether supply-side pressures may reignite.
European Central Bank (ECB) Governing Council member Villeroy de Roy explicitly stated that a rate hike should not be expected at next week's meeting, emphasizing the need for calm amid the Iranian conflict. The conflict has increased uncertainty and could lead to a combination of slightly higher inflation and lower growth, but French inflation will remain low, with no risk of stagflation emerging. Another Governing Council member, Nagel, pointed out that inflation risks have risen and the economic outlook has deteriorated. If soaring energy prices translate into more persistent inflation, the ECB will act decisively. However, a wait-and-see approach is more appropriate at present, and the latest statements from the US regarding the conflict have brought some optimistic expectations. These remarks are not unexpected, but rather typical of the central bank's cautious response in the early stages of the conflict. Less than two weeks after the outbreak of the conflict, oil prices initially surged but then fell back, giving policymakers some flexibility. Both Villeroy and Nagel emphasized that policy options are crucial to avoid hasty conclusions and to prevent repeating the mistake of misjudging the "temporary" nature of inflation in 2021-2022. The ECB currently maintains its deposit facility rate at 2.00%, its main refinancing rate at 2.15%, and its marginal lending rate at 2.40%.
The conflict's dual impact on the Eurozone lies in the coexistence of cost-push and demand-suppressive factors. Rising energy prices directly increase production costs, potentially putting pressure on the purchasing managers' indices (PMIs) of the services and manufacturing sectors. Meanwhile, slower economic growth will suppress demand-side inflationary pressures, creating a self-regulating mechanism. France's low inflation data reflects this balance; its energy dependence and price transmission mechanism are relatively mild, preventing the region from falling into stagflation. Nagel specifically mentioned that if the energy shock persists, inflation concerns will take precedence over slower growth, requiring policymakers to closely monitor wage and expectation anchoring. Currently, Eurozone service inflation has accelerated to 3.4%, but energy prices remain negative year-on-year, indicating that the transmission has not yet fully spread. The ECB's adherence to a gradual approach is precisely to preserve policy space before the data becomes clearer.
Meanwhile, the European Central Bank (ECB) is set to hold its monetary policy meeting next week, and markets are closely watching how policymakers will address the energy cost pressures and economic slowdown risks stemming from geopolitical uncertainties. The latest policy signals suggest that the ECB is inclined to maintain a wait-and-see approach, avoiding overreacting to short-term shocks. This provides traders with a crucial reference point for assessing the pricing path of Eurozone assets.
Energy market turmoil triggered by the situation in the Middle East
The conflict with Iran has lasted for about two weeks. Initially, market concerns about potential supply disruptions in the Strait of Hormuz drove oil prices up rapidly, but the gains quickly narrowed as signs of diplomatic de-escalation emerged. Currently, Brent crude is stable around $87 per barrel, while WTI crude fluctuates around $83 per barrel. This dynamic reflects the short-term transmission characteristics of geopolitical risks: rising energy prices can increase overall price levels through cost-push mechanisms, while simultaneously suppressing business investment and consumer spending, leading to weakened economic growth momentum. Some analysts believe that a $10 increase in oil prices per barrel could contribute about 0.3 to 0.5 percentage points to the Eurozone's annualized inflation rate, but if the conflict subsides quickly, this impact will be mainly limited to the short term. In contrast, persistent supply disruptions will amplify the second-round effects, especially given that service sector inflation has already reached 3.4%. The European Central Bank's policymakers have clearly stated that the current decline in oil prices provides breathing room for policy adjustments, but uncertainty remains, and any persistent rise in energy prices could alter the trajectory of inflation expectations.
| index | Eurozone February (%) | January(%) | France in February (%) | January(%) |
|---|---|---|---|---|
| Overall inflation rate | 1.9 | 1.7 | 1.0 | 0.3 |
| Core inflation rate | 2.4 | 2.2 | - | - |
| Energy price changes | -3.2 | -4.0 | -3.0 | -7.6 |
In-depth analysis of the latest policy signals from European Central Bank policymakers
European Central Bank (ECB) Governing Council member Villeroy de Roy explicitly stated that a rate hike should not be expected at next week's meeting, emphasizing the need for calm amid the Iranian conflict. The conflict has increased uncertainty and could lead to a combination of slightly higher inflation and lower growth, but French inflation will remain low, with no risk of stagflation emerging. Another Governing Council member, Nagel, pointed out that inflation risks have risen and the economic outlook has deteriorated. If soaring energy prices translate into more persistent inflation, the ECB will act decisively. However, a wait-and-see approach is more appropriate at present, and the latest statements from the US regarding the conflict have brought some optimistic expectations. These remarks are not unexpected, but rather typical of the central bank's cautious response in the early stages of the conflict. Less than two weeks after the outbreak of the conflict, oil prices initially surged but then fell back, giving policymakers some flexibility. Both Villeroy and Nagel emphasized that policy options are crucial to avoid hasty conclusions and to prevent repeating the mistake of misjudging the "temporary" nature of inflation in 2021-2022. The ECB currently maintains its deposit facility rate at 2.00%, its main refinancing rate at 2.15%, and its marginal lending rate at 2.40%.
The delicate balance between inflation and economic growth
The conflict's dual impact on the Eurozone lies in the coexistence of cost-push and demand-suppressive factors. Rising energy prices directly increase production costs, potentially putting pressure on the purchasing managers' indices (PMIs) of the services and manufacturing sectors. Meanwhile, slower economic growth will suppress demand-side inflationary pressures, creating a self-regulating mechanism. France's low inflation data reflects this balance; its energy dependence and price transmission mechanism are relatively mild, preventing the region from falling into stagflation. Nagel specifically mentioned that if the energy shock persists, inflation concerns will take precedence over slower growth, requiring policymakers to closely monitor wage and expectation anchoring. Currently, Eurozone service inflation has accelerated to 3.4%, but energy prices remain negative year-on-year, indicating that the transmission has not yet fully spread. The ECB's adherence to a gradual approach is precisely to preserve policy space before the data becomes clearer.
Frequently Asked Questions
Question 1: What is the specific path of the impact of the Iranian conflict on inflation and growth in the Eurozone?
A: The conflict is mainly transmitted through energy prices, raising costs and pushing up inflation in the short term, but simultaneously suppressing demand and leading to slower growth. Eurozone overall inflation rose to 1.9% in February, while France's was only 1.0%, indicating regional differences in buffering mechanisms; only a prolonged conflict could amplify the second round of effects.
Question 2: Why did European Central Bank policymakers emphasize that they will not raise interest rates at next week's meeting and will adopt a wait-and-see strategy?
A: Less than two weeks after the outbreak of the conflict, the initial surge in oil prices has subsided, and policymakers need more data to verify the persistence of the impact. Both Villeroy and Nagel pointed out that maintaining flexibility can avoid historical misjudgments, and the current neutral interest rate level provides ample room for maneuver.
Question 3: What is the core value of these policy signals in understanding the Eurozone monetary policy framework?
A: The key lies in balancing uncertainty with historical lessons, emphasizing options rather than predetermined paths. This helps the market understand how central banks dynamically adjust amid rising inflation risks and deteriorating growth prospects, preventing a single event from dominating pricing logic.
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