European Central Bank set to hold interest rate amid Iran war-driven inflation fears
- The European Central Bank is likely to adopt a wait-and-see approach amid the Iran war.
- ECB President Lagarde is likely to face multiple questions related to the impact of the Middle East conflict.
- The Federal Reserve kept rates unchanged, as expected, and forecasts one rate cut in 2026.
- EUR/USD heads into the ECB announcement with a firming bearish tone.
The European Central Bank (ECB) will announce its monetary policy decision on Thursday, following a two-day meeting. The ECB is widely expected to keep interest rates on hold for the sixth consecutive meeting, leaving the main refinancing operations, the marginal lending facility, and the deposit facility at 2.15%, 2.4% and 2%, respectively.
Nevertheless, the macroeconomic scenario is much different from that at all previous meetings: a war in the Middle East has changed it all. ECB President Christine Lagarde has coined a new financial term, “good place,” to describe the ECB’s monetary policy stance before the war unfolded.
ECB President Christine Lagarde will hold a press conference following the announcement. Lagarde usually responds to questions aimed at explaining the reasoning behind the central bank’s decision. It’s quite likely that the Q&A will revolve around the war, oil prices, and their potential impact on inflation, and hence, future ECB monetary policy decisions.
Ahead of the announcement, the EUR/USD pair trades around the 1.1500 mark, following the Federal Reserve (Fed) monetary policy announcement.
What to expect from the ECB interest rate decision?
The ECB found a delicate balance in which inflation reached policymakers’ 2% inflation threshold, growth began to show signs of life, and interest rates were more than halved from the post-pandemic record highs.
As said, the Iran war changed it all. United States (US) President Donald Trump’s decision to join Israel and crush Iran’s nuclear power has resulted in an all-in Persian Gulf conflict, which has pushed Oil prices to levels last seen in 2021. Fears of inflation resuming its upward trend hit all major economies amid energy supply disruptions, as the war interrupted transit through the Strait of Hormuz.
It is quite unlikely that officials will immediately respond to the new world frame. Policymakers are likely to adopt a wait-and-see stance while repeating they are vigilant of macroeconomic developments and ready to act as needed.
Days after the war began, ECB President Christine Lagarde noted that the central bank would do everything necessary to keep price pressures tamed. “We will do everything necessary to keep inflation under control and ensure that the French and the Europeans do not experience inflation increases like those we saw in 2022 and 2023,” comparing the current situation to that triggered by the Russia-Ukraine war.
Also, ECB policymaker Joachim Nagel said that the central bank will move “quickly and decisively” if higher fuel prices lead to rising inflation in the EU, in an interview with Reuters.
Meanwhile, the Federal Reserve (Fed) announced its decision on monetary policy. As expected, the Fed kept its Fed Funds Target Range (FFTR) unchanged at 3.50%–3.75%.
The Summary of Economic Projections (SEP) showed policymakers still expect to deliver one rate cut in 2026 and another one in 2027. Additionally, officials revised inflation higher, with PCE inflation now expected at 2.7% at the end of 2026 vs 2.4% in December. Officials also revised their growth forecast, now seen at 2.4% for this year vs 2.3% in the previous SEP. Unemployment is seen at 4.4% for this year, unchanged from the previous estimate.
The market showed a limited reaction to the news, although prevalent risk-aversion maintained the USD on the winning side across the FX board.
The ECB is likely to adopt a cautious approach to current developments and refrain from taking a certain position on the war’s potential impact on the Euro (EUR). President Christine Lagarde is likely to repeat that officials are ready to act when needed, but refrain from providing details on the matter.
How could the ECB meeting impact EUR/USD?
As previously noted, the EUR/USD pair is hovering around 1.1500 as the USD benefits from a risk-averse environment.
Valeria Bednarik, FXStreet Chief Analyst, notes: “Technically speaking, the EUR/USD pair is bearish. The daily chart shows it remains far below all its moving averages, with a bearish 20-day Simple Moving Average (SMA) having crossed below directionless 100-day and 200-day SMAs. At the same time, technical indicators maintain their downward slopes within negative levels after correcting oversold conditions. Immediate support comes at around 1.1480, ahead of March's monthly low at 1.1411, which stands as a critical bearish barrier, unlikely to be tested within the ECB event.”
Bednarik adds: “The EUR/USD pair would need to recover beyond 1.1560 to shrug off the near-term negative tone. Additional gains expose the 1.1600 mark ahead of the 1.1640 price zone, although it seems unlikely the ECB could deliver a hawkishly enough message to push the pair towards the latter.”
Economic Indicator
ECB Rate On Deposit Facility
One of the European Central Bank's three key interest rates, the rate on the deposit facility, is the rate at which banks earn interest when they deposit funds with the ECB. It is announced by the European Central Bank at each of its eight scheduled annual meetings.
Read more.Next release: Thu Mar 19, 2026 13:15
Frequency: Irregular
Consensus: 2%
Previous: 2%
Source: European Central Bank
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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