Account 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 2026

Financial market developments

Ms 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.