The European Central Bank (ECB) on Thursday kept its key interest rates on hold, as widely anticipated, while issuing a stark warning about the inflationary pressures and economic slowdown stemming from the ongoing conflict in Iran. The central bank for the 21 countries that share the euro sets monetary policy to maintain price stability in the euro area. It maintained the rate it pays on bank deposits at 2%, a decision economists and policymakers, including President Christine Lagarde, had suggested.
However, the ECB significantly sharpened its caution regarding the fallout from the Iran conflict and the associated disruptions in fuel flows through the Strait of Hormuz on the euro zone’s economy. In a press release, the ECB stated, “While the incoming information has been broadly consistent with the Governing Council’s previous assessment of the inflation outlook, the upside risks to inflation and the downside risks to growth have intensified.” It further added that the longer the war continues and energy prices remain high, the stronger the likely impact on broader inflation and the economy. Euro zone inflation is currently above the ECB’s 2% target and is expected to climb further, while growth exhibits signs of weakness.
The central bank noted that longer-term inflation expectations remain well anchored, though shorter-term expectations have risen significantly. Investors are anticipating the ECB to raise the deposit rate three times over the next 12 months, potentially reaching 2.75%. Alongside the deposit rate, the ECB also held the rates at which banks can borrow at its weekly and daily auctions at 2.15% and 2.40% respectively. Attention now shifts to ECB President Christine Lagarde’s news conference scheduled for 1245 GMT.
