FRANKFURT - The European Central Bank on Thursday revised upward its inflation projections, attributing the change to higher energy costs and flagging the possibility that a drawn-out war in the Middle East could push prices even higher. The bank's updated baseline places inflation at 2.6% in 2026, up from 1.9% in the December outlook, and at 2.0% in 2027 compared with the prior 1.8% estimate. Both figures exceed or sit at the ECB's 2% objective.
Officials emphasised the role of oil market dynamics in the revision. The bank noted that oil prices have nearly doubled since the start of the year and acknowledged this as a material upside risk to the inflation trajectory. To capture that possibility, the ECB said it will publish alternative scenario analyses that incorporate the impact of prolonged disruptions in the supply of oil and gas.
"The scenario analysis suggests that a prolonged disruption in the supply of oil and gas would result in inflation being above, and growth being below, the baseline projections," the ECB said. Those supplementary scenarios were scheduled for publication at 1445 GMT, with ECB President Christine Lagarde likely to outline them during her news conference at 1345 GMT.
Financial market participants are watching these developments closely. Investors worry that a sustained rise in inflation could prompt the ECB to resume interest rate increases to prevent a temporary energy shock from embedding itself in broader price-setting and longer-term inflation expectations. Market-implied forecasts have shown concern that inflation might climb to above 3.5% within a year and then take several years to return to 2%, though those expectations have been described as volatile and sensitive to changes in the conflict in Iran.
The ECB also published its baseline projections for GDP growth, inflation and core inflation, juxtaposed with its December forecasts (shown in brackets):
| 2026 | 2027 | 2008 | |
|---|---|---|---|
| GDP Growth | 0.9 (1.2%) | 1.3% (1.4%) | 1.4% (1.4%) |
| Inflation | 2.6 (1.9%) | 2.0% (1.8%) | 2.1% (2.0%) |
| Core inflation | 2.3 (2.2%) | 2.2% (1.9%) | 2.1% (2.0%) |
Policy makers are drawing attention to the potential for elevated oil prices to transmit into broader inflation measures and to weigh on economic activity. The ECB's scenario work is intended to show how a sustained shock to energy supplies would alter the central bank's baseline outlook by keeping consumer prices higher while trimming growth expectations.
Market reaction to the updated forecasts has been evident in forward-looking measures of inflation expectations that are prone to sharp swings as developments in the Middle East evolve. The ECB's decision to produce alternative scenarios aims to make explicit how persistent disruptions to oil and gas supplies would change the policy and macroeconomic landscape rather than leaving such outcomes implicit within a single baseline projection.
Lagarde's press briefing later in the day was expected to preview the scenario publication and provide further detail on the bank's assessment of the risks posed by current energy market trends.