ECB Council Review: Be Wary of Inflation Risks

■ ECB Governing Council Keeps Policy Rates Unchanged; President Lagarde Expresses Caution Over Upside Inflation Risks  
■ Staff Raise Price Forecasts Upward; Focus on Secondary Transmission of Energy Shocks Regarding Interest Rate Hikes 
 
At the European Central Bank (ECB) Governing Council meetings held on March 18th and 19th, the policy rate remained unchanged for the sixth consecutive time. ECB President Lagarde stated at a press conference that due to the tense situation in the Middle East, there is a need to be wary of "upside risks to inflation," and hinted that the ECB is prepared to take action if necessary. On the other hand, she pointed out that while the recent rise in energy prices will have a "significant impact on short-term inflation," its medium-term impact "depends on the intensity and duration of the conflict, and the way energy prices are transmitted," showing cautious concern about medium-term transmission. Furthermore, she mentioned the difference between the situation in 2022, where interest rate hikes were delayed due to a surge in inflation, and the current situation. At that time, when the Russian invasion of Ukraine triggered the shock, the inflation rate had already exceeded 6%, while the current inflation rate is approaching the 2% target level, and the labor market is not overheated, a situation different from then. In summary, President Lagarde's press conference reflected both vigilance regarding inflation and indicated that future policy decisions would be based on data-driven assessments, presenting a balanced approach overall. 

 
On the other hand, the staff's macroeconomic forecasts clearly signaled a hawkish stance (tightening monetary policy). Baseline forecasts show that, considering recent energy price increases, price expectations have been significantly revised upwards, with the overall HICP and the core HICP excluding energy, food, alcohol, and tobacco showing stickiness. The overall inflation rate is projected to rise to 2.6% year-on-year in 2026, an upward revision of 0.7 percentage points from the previous forecast. While the core HICP has only been revised upwards by about 0.1 percentage points, it is still projected to be 2.3% in 2026 and 2.1% in 2028, failing to converge to the inflation target within the forecast period. Meanwhile, the real GDP growth rate is projected to be 0.9% in 2026, a slight downward revision of 0.3 percentage points from the previous forecast. In the risk scenarios (Adverse and Severe scenarios) with stricter assumptions about oil prices in 2026, prices will rise further significantly, but the impact on the economy is expected to remain relatively mild. 

 
Given the ECB's heightened vigilance regarding rising prices, developments in the Middle East could increase the risk of a tightening policy stance. A key focus going forward is whether energy shocks will have a secondary impact on prices. It is also worth noting changes in several indicators listed by President Lagarde at the press conference (including dynamics in various commodity markets, supply bottlenecks, corporate sales price expectations, demand indicators such as PMI and consumer confidence, and wage dynamics).