ECB must not be swayed by the oil price shock
Lena Dräger, Research Director of the Monetary Macroeconomics Group at the Kiel Institute for the World Economy, comments on the European Central Bank’s (ECB) expected decision to keep the key interest rate unchanged today:
“At its meeting on March 19, 2026, the ECB should keep policy interest rates unchanged—and not allow itself to be lured into hasty reactions by the recent turbulence in the energy markets. With a policy rate of 2.0 percent, monetary policy is currently roughly in the neutral range, while inflation has recently been slightly below target.
The rise in oil prices following the war in Iran—most recently to over USD 100 per barrel—is reminiscent of the energy shock after Russia’s attack on Ukraine in 2022. Yet the comparison shows above all how different the monetary policy conditions today are.
In 2022, the ECB was bound by its own “forward guidance.” It had clearly signaled that it would first end net bond purchases under the Asset Purchase Programme (APP) before raising interest rates. This approach was important for the credibility of its communication—but it also led to a delayed monetary policy response to the rise in inflation, and monetary policy was temporarily perceived as being “behind the curve.”
Today, this conflict of objectives no longer exists. Bond purchases have ended, interest rates are in the neutral range, and the ECB can react much more flexibly. At the same time, inflation is not already elevated at the time of the shock, as was the case in early 2022. Precisely for this reason, there is currently no cause for hasty interest rate hikes.
One key parallel remains, however: Once again, there is a risk that an energy price shock will seep into wages, prices, and inflation expectations through second-round effects. This is precisely where the real monetary policy challenge lies.
The monetary policy lesson from 2022 is therefore twofold: The ECB should not find itself in a situation where it is either ahead of or behind the curve, whether due to institutional constraints or hasty activism. The correct strategy is therefore clear: remain patient but be ready to act. The ECB should wait and see for now—while at the same time signaling unequivocally that it will react decisively at the first signs of rising inflation expectations and second-round effects.”
