ECB raises inflation forecast on higher energy costs

FRANKFURT, March 19 (Reuters) - The ‌European Central Bank ​raised ​its inflation projections on Thursday on higher energy costs and said there was a risk of price growth ‌going even higher in case of a prolonged war in ⁠the Middle East.

The ECB now sees 2026 inflation at 2.6% in a "baseline" scenario, ‌above the 1.9% predicted in ‌December, and well above its 2% target. For 2027, it saw inflation at 2.0 versus its previous projection for 1.8%.

But the ​bank acknowledged the risk from higher oil prices, which have nearly doubled since the start of the year, and said it ⁠will publish alternative scenarios to reflect the risk of a prolonged U.S.-Israeli war on Iran ​and elevated oil prices.

"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.

These alternative scenarios will be published at 1445 GMT but ⁠ECB President Christine Lagarde is likely to preview them in her 1345 GMT news conference.

Financial investors fear that inflation could go much higher in ⁠coming months and eventually force the ECB to start hiking interest rates to ​prevent the energy shock from seeping into the broader economy and pushing up longer-term expectations.

Markets think inflation could surge to above 3.5% in a year and ‌then take several years to come back down to 2%. These expectations are volatile, however, and prone to ‌sharp swings on the twists and turns of the war in ⁠Iran.

The following are the ECB's ‌baseline projections for inflation ​and GDP growth. Its previous projections from December are 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%)

(Reporting by Balazs Koranyi; Editing by ‌Catherine Evans)

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