French economic confidence plunged in March as the Iran-Israel conflict disrupted growth prospects and oil prices surged. INSEE’s manufacturing index fell to 99 (from 102 in February), marking the first sub-100 reading since November 2023. Consumer confidence dipped to 89, the lowest in four months, while household inflation expectations hit a 12-month high. Bank of France Governor Francois Villeroy de Galhau warned that Middle East tensions risk triggering a wage-price spiral, though the central bank remains hesitant to cut rates.

The ECB faces mounting pressure to address energy cost spillovers, with INSEE’s price outlook balance jumping to -1 (from -29 in February). Business leaders reported weaker order books and production forecasts, citing geopolitical uncertainty. Households grew increasingly pessimistic about finances, reflecting soaring living costs. Oil prices—up 18% since January—have intensified inflationary risks, complicating the ECB’s data-dependent policy decisions.

Villeroy emphasized that while the Bank of France isn’t responsible for oil prices, it must prioritize “anchoring inflation expectations” to prevent economic destabilization. The surveys, conducted over three weeks including Iran strikes, reveal a sharp slowdown in business optimism. Manufacturing activity remains below the long-term average, signaling prolonged weakness in Europe’s second-largest economy.

With the ECB’s next rate decision looming, analysts stress the urgency of balancing growth support and inflation control. The European Central Bank’s stance hinges on whether oil-driven price hikes permeate broader markets—a critical factor shaping eurozone monetary policy in the coming months.