OECD vs markets: the ECB at the heart of the disagreement - 30 March 2026

As investors question the credibility of a de-escalation scenario for the war in Iran, the OECD is releasing its new economic forecasts. It expects resilient global growth, a temporary bout of inflation, and relatively placid central banks. European markets, however, fear that ECB rates will rise significantly more than the OECD suggests.

Macroeconomic forecasting exercises are always tricky and, with the war in Iran, must be treated with even more caution than usual. It is nevertheless useful to compare them with market expectations. Published on 26 March, the new OECD forecasts incorporate a central scenario of de-escalating energy prices from the middle of 2026. Under this hypothesis – which is clearly fragile – global growth would lose around 0.3% to 0.4% by the end of 2026 compared with the promising momentum of the first two months of the year (Chart 1). Annual growth would reach 2.9% on average in 2026 and 3% in 2027, after 3% in 2025. Driven among other things by investment in AI, defence spending, fiscal support (United States, Germany) and the recent reduction in US customs duties, the global economy should therefore be able to hold up. This would obviously be much less the case under an alternative scenario of further, lasting overheating in oil and gas prices.

On the inflation front, the OECD is forecasting a substantial but temporary shock in 2026, consistent with the assumption of energy price de-escalation in the second half of the year. Headline inflation would rise to 4% in the G20 in 2026, after 3.4% in 2025, before falling back to 2.7% in 2027. Above all, inflation excluding food and energy would barely move: 2.6% in advanced economies in 2026, as in 2025, then 2.3% in 2027.

This is why the OECD does not recommend that central banks react sharply to the shock. It is assuming a status quo from the Fed and the Bank of England, and only one rate hike by the ECB, while the Bank of Japan would continue normalising its interest rates (Chart 2).

As far as the Fed is concerned, market expectations are currently in line with the OECD’s view. For the ECB, however, financial markets have turned much more pessimistic. They now price in 3 to 4 rate hikes this year, that is, 100 basis points more than they were expecting before the war in Iran (Chart 3). Some ECB members have, it must be said, been very quick to communicate their desire to raise interest rates rapidly. Their aim is to appear as credible as possible, in order to avoid any risk of medium-term inflation expectations becoming unanchored. They also have in mind 2022, when the second-round effects of the price shock linked to the war in Ukraine spread forcefully to the rest of the economy. They are also worried that memories of the 2022 inflation shock may lead companies to raise their prices quickly in response to the new shock.

As regards medium-term expectations, the message from markets is, for the time being, positive. Measured on the inflation swap market, “5-year, 5-year forward” inflation has risen by only a few basis points since 28 February, compared with 50 basis points in the days following the outbreak of war in Ukraine (Chart 4). This assessment will, however, need to be supplemented with other indicators, including surveys of households and businesses.

As has been repeatedly underlined, including by the ECB, the current situation is different from that of 2022. Overall inflationary pressures are constrained by a more fragile labour market in France and Germany, by emerging wage disinflation, and by interest rates that are much higher than in 2022 (ECB rates were negative at the beginning of 2022 and remained so until September). The inflation rate in February 2026 was 1.9% in the euro area, compared with 5.1% in January 2022. Finally, the rise in natural gas prices has been more limited, and electricity prices are less sensitive to it because of the recovery in French nuclear capacity and the ramp-up of renewable energies.

We shall see what the ECB actually does, but for the moment everything is happening as if it had already tightened policy, since financial conditions have deteriorated markedly. Equity markets have fallen, bond yields have risen, and sovereign spreads over Germany have widened again. The yield curve has also flattened, with very long-term rates barely moving while two-year yields have risen by 75 basis points (Chart 5). These moves suggest that markets are already pricing in a significant risk of sharp economic slowdown.

The task is therefore far from straightforward for the ECB, since its credibility is judged both on inflation and on the potential impact of its policy on growth, even though the latter is not officially part of its mandate. The experiences of 2008 and 2011, when the ECB raised rates in the middle of a crisis only to cut them sharply afterwards, are fresh in everyone’s mind.

On this point at least, markets are not being complacent. If the OECD scenario of a single ECB rate hike were to materialise, bond yields would fall back significantly. At this stage, and pending further news on the hoped-for de-escalation of the war in Iran, we are maintaining a moderate duration in our global bond funds.