The March reading of consumer inflation in the eurozone accelerated to 2.5% year on year, up from 1.9% in February, mainly in response to tensions in the Middle East and rising energy commodity prices. At the same time, the result came in slightly below market expectations of 2.6%. Core inflation stood at 2.3% year on year, also marginally below forecasts.
The biggest change, however, took place in expectations regarding monetary policy. Until recently, the market had been pricing in an interest rate cut in 2026, but the scenario has now shifted toward possible rate hikes. This is the result of a sharp rise in oil and gas prices, which increases the risk of inflationary pressure becoming more persistent.
At this stage, however, it is still difficult to determine the future path of interest rates. The key factor remains the development of the geopolitical situation — both the duration and the scale of the conflict will determine the strength of the supply shock. As a consequence, the European Central Bank is currently adopting a more wait-and-see approach, which was reflected in its decision to keep interest rates unchanged at its March meeting.
