ECB holds rates, revises inflation higher and growth lower, highlighting stagflation risks while resisting commitment to a tightening path. The Governing Council kept the deposit rate unchanged at 2.00%, as widely expected, but updated projections revealed a more challenging macro backdrop driven by rising energy prices.
- Headline inflation is now projected to average 2.6% in 2026, before easing to 2.0% in 2027 and 2.1% in 2028.
- Core inflation, which excludes energy and food, is also expected to remain elevated, at 2.3% in 2026, 2.2% in 2027, and 2.1% in 2028.
These upward revisions reflect the pass-through of higher energy costs into broader price pressures, suggesting inflation risks are no longer confined to volatile components.
- At the same time, the growth outlook has been downgraded. GDP is now expected to expand by just 0.9% in 2026, before recovering modestly to 1.3% in 2027 and 1.4% in 2028.
The ECB pointed to weaker real incomes, softer confidence, and global spillovers from the energy shock as key drags, even as low unemployment and fiscal spending provide some support.
Despite higher inflation projections, the ECB refrained from signaling any imminent tightening. The Governing Council reiterated its data-dependent, meeting-by-meeting approach and stressed that it is not pre-committing to a particular rate path. This suggests policymakers are wary of tightening prematurely amid weakening growth dynamics.
Scenario analysis highlights the risks ahead. A prolonged disruption to energy supply would push inflation above baseline projections while further weakening growth, intensifying the policy trade-off.
