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Meeting of 18-19 March 2026Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 18-19 March 202616 April 20261. Review of financial, economic and monetary developments and policy optionsFinancial market developmentsMs Schnabel started her presentation by noting that the period after the Governing Council’s previous monetary policy meeting on 4-5 February 2026 could be divided into two distinct phases. In the first phase, up to the start of the war in the Middle East, the low-volatility and strong risk appetite environment had remained in place. In the second phase, when energy prices had surged in response to the war, volatility had increased in equity markets and especially in bond markets, and there had been sell-offs in both risk asset markets and bond markets. Brent crude oil prices had surged above USD 100 per barrel to levels last seen after the Russian invasion of Ukraine in 2022. Natural gas prices had also increased substantially, but had remained well below their 2022 levels. At the same time, the Brent crude oil futures curve had shown historically high backwardation – a strong negative slope – suggesting that traders were expecting the spike in oil prices to be reversed quickly. However, over time traders had pared back expectations of a swift reversal of the spike in energy prices. Since the beginning of the war, the Brent crude oil futures curve had gradually shifted upwards and stood visibly above the curve that had prevailed shortly after it started. Comparing market reactions in the first week of the war with past geopolitical shocks accompanied by energy price increases showed that the reactions of euro area equity prices, the EUR/USD exchange rate and financial market volatility had been at the upper end of the historical ranges. Interest rate markets had reacted more strongly than suggested by historical regularities. The increase in near-term inflation compensation had been at the upper end of the range seen with previous shocks, and was only comparable to the sharp increase after the Russian invasion of Ukraine in 2022. Most notably, in previous episodes, risk-free overnight index swap (OIS) rates and policy expectations had tended to decline in response to energy price shocks, as investors had seemingly priced in the negative impact on economic growth as dominating the inflationary impulse. This time around, markets were pricing in the view that the inflationary effects of the war dominated, requiring a tightening of monetary policy. The energy supply shock had had a large impact on near-term inflation compensation in the euro area. Inflation fixings (excluding tobacco) for 2026 had increased sharply and inflation-linked swap forward rates stood above 2% across horizons. Longer-term inflation compensation had remained broadly stable, however, reflecting market participants’ assessment of the credibility of monetary policy. The shifts had been driven in broadly equal parts by higher genuine inflation expectations and by higher inflation risk premia, as investors expected higher inflation but also demanded compensation for higher inflation uncertainty in a geopolitically fragmented world. Based on evidence from option prices, the balance of risks to the outlook for inflation over the two-year horizon and the five-year horizon had also shifted up sharply and was currently tilted to the upside, especially over shorter horizons. By contrast, risks over the longer term had remained broadly balanced. Shifts in inflation compensation, rather than in real rates, had dominated developments in euro area risk-free rate markets. Nominal rates in both the euro area and the United States had moved up significantly. The reassessment of inflation prospects had been substantially more pronounced in the euro area across horizons. At the same time, euro area two-year real rates had declined, reflecting a downward revision to economic growth, whereas US two-year real rates had remained broadly stable. Long-term real rates had increased in the United States but had remained stable in the euro area. Both in the euro area and in the United States, the rise in longer-term nominal rates had been driven by higher short-term rate expectations, indicating expectations of tighter monetary policy, and a higher term premium, reflecting greater uncertainty about the impact of the war on the longer-term outlook for the economy and for inflation. Following the Governing Council’s previous monetary policy meeting the OIS forward curve had edged lower, pricing in a roughly one-third probability of a 25 basis point rate cut by the end of 2026. This trend had reversed sharply following the start of the war. According to the latest curve, investors were pricing in rate hikes of about 40 basis points by the end of 2026, with some volatility regarding the exact number. Moreover, there had been a sharp rise in uncertainty surrounding the path of the ECB’s monetary policy in response to the energy price shock, after rate uncertainty had hovered around multi-year lows ahead of the war. By contrast, in the Survey of Monetary Analysts, as well as in the subsequent Bloomberg and Reuters surveys, participants had reported that they anticipated that policy rates would remain at their current levels throughout 2026 and 2027. In the United States, markets had revised their monetary policy expectations to a similar degree, despite the US economy being more shielded from the energy shock. The degree to which asset prices had been affected across countries and sectors depended on their exposure to the energy price shock. The euro area’s terms of trade had deteriorated markedly since the start of the war, reflecting its position as a net energy importer. The exposure to the energy shock was affecting exchange rate dynamics. The EUR/USD exchange rate had closely tracked changes in European energy prices over recent weeks, with the euro depreciating markedly against the US dollar. The euro had, however, held up slightly better than the euro area’s large net energy import position would have suggested. Nevertheless, near-term risks to the EUR/USD exchange rate remained tilted to the downside, while medium-term risks remained broadly balanced, suggesting that markets perceived the terms-of-trade shock to be short-lived. Risk appetite had deteriorated since the start of the war. The decline had been somewhat more pronounced in the euro area than in the United States, which was consistent with the greater energy dependence of the euro area. That said, the deterioration had remained contained overall. By way of comparison, in response to the Russian invasion of Ukraine in 2022 and the April 2025 tariff shock, risk sentiment had deteriorated much more sharply. The dominant driver of the correction in equity prices since the outbreak of the war in the Middle East had been the rise in risk-free rates. Higher risk premia and somewhat weaker long-term earnings expectations had contributed only to a limited extent. The sharpest correction had been seen for euro area financial stocks, which had underperformed after having significantly overperformed in 2025.One reason for the underperformance of financial stocks had been their exposure to private markets, which had come under increased scrutiny over past months. Euro area private markets remained small compared with the US market, but they too had grown at double-digit rates since 2010, across both private equity and private credit. One major concern about private markets was their opacity. Recent concerns had focused on the sizeable and growing exposures of private funds to the technology and software sectors. The escalation of geopolitical tensions had added to the concerns about private markets. Tighter financing conditions and weaker growth would exert pressure on highly leveraged firms, reinforcing downside risks in this segment. Several large funds had experienced an increase in the volume of redemption requests and had applied – often contractually stipulated – withdrawal restrictions. Credit spreads in fixed income markets had also come under some upward pressure. Euro area sovereign bond spreads over OIS rates had widened, with the exception of German bond spreads. Markets judged that the conflict in the Middle East would have some impact on growth and fiscal balances, and this was contributing to a rise in risk premia. Overall, the widening of spreads had remained contained, including in corporate bond markets. This was consistent with the modest tightening seen in financial conditions so far. The ECB’s Macro-Finance Financial Conditions Index (“Macro-Finance FCI”) had tightened on the back of lower risk asset prices and higher long-term interest rates. However, so far it had remained in the range observed since the summer of 2025.Finally, money markets had hardly been affected by recent events. Demand in the Eurosystem’s standard refinancing operations had been low and stable over the past year as excess liquidity had remained abundant. However, there were encouraging signs that banks were increasingly making sure that they were ready to borrow in these operations, as the number of banks participating in operations had been rising steadily, even if the amounts involved remained small.The global environment and economic and monetary developments in the euro areaMr Lane then went through the latest economic, monetary and financial developments in the global economy and the euro area.Prior to the onset of the war in the Middle East, the incoming information had appeared to broadly confirm the December projections baseline. The war had made the outlook significantly more uncertain, with upside risks to inflation and downside risks to output. Starting with inflation developments in the euro area, headline inflation had increased to 1.9% in February, from 1.7% in January. Energy inflation had risen to -3.1%,