MNI ECB WATCH: War Moves ECB From 'Good Place' To 'Good Base'

The European Central Bank left rates unchanged on Thursday for a sixth consecutive meeting, calling the Iran war “a major shock” which creates upside risks for inflation and downside risks for growth.

ECB president Christine Lagarde backed away from previous declarations that policy was in a “good place”, switching it from “good base” from which the central bank will face the inflation fallout from the war.

"I'm not saying that we are in a good place, we are well positioned," she said, “we are starting from a good base,” noting that the Governing Council was " well equipped to deal with the development of a major shock that is unfolding, and we will continue doing that." (See MNI SOURCES: Energy Surge Pushes ECB Out Of 'Good Place' )

The war will have a material impact on near-term inflation and medium-term implications will depend both on the intensity and duration of the conflict, Lagarde said, in a statement, after what she said was a unanimous decision to leave the deposit rate at 2.0%, adding that ECB "is well positioned to navigate this uncertainty.”

Lagarde said the ECB would continue its data-dependent and meeting-by-meeting approach to setting policy. Policymakers would be "particularly attentive to commodities, supply bottlenecks, selling price expectations....to all demand indicators, wage trackers. All of that will depend on duration, intensity and propagation of indirect effects.” (See MNI SOURCES: ECB's Ukraine Lesson Lowers Oil Shock Tolerance ).

In contrast to the situation at the time of the Russian invasion of Ukraine in 2022, the ECB faces this crisis with inflation around 2%, a cooler labour market and inflation expectations anchored, Lagarde said. However, fresh memories of the previous inflation episode could rapidly increase expectations, she added.

CUT-OFF MARCH 11

Staff projections exceptionally incorporated price assumptions up to March 11, a later cut-off date than usual, she said with two alternative scenarios that did not factor in include monetary policy action. (See MNI SOURCES: ECB Projections To Include Pricing Since Iran War )

In the baseline projection, headline inflation was revised up to an average 2.6% in 2026, 2.0% in 2027 and 2.1% in 2028.  For inflation excluding energy and food, staff project 2.3% in 2026, 2.2% in 2027 and 2.1% in 2028. Growth should average 0.9% in 2026, 1.3% in 2027 and 1.4% in 2028.