The European Central Bank (ECB) kept its key interest rates unchanged on Thursday, while warning that the war involving Iran is intensifying inflation risks and weighing on economic growth in the euro zone.
The central bank, which sets monetary policy for the 21 countries using the euro, left its deposit rate at 2%, in line with market expectations.
Policymakers, including ECB President Christine Lagarde, had previously signalled a pause in rate adjustments.
Inflation risks rise amid geopolitical tensions
In its policy statement, the ECB sharpened its warning on the economic fallout from the ongoing conflict involving Iran.
The disruption to fuel flows, particularly through the Strait of Hormuz, has pushed energy prices higher, adding pressure on inflation.
“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,” the ECB said.
The central bank added, “The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy.”
Inflation in the euro zone is already above the ECB’s 2% target and is expected to rise further in the coming months.
At the same time, economic growth is showing signs of slowing, creating a challenging policy environment.
Short-term expectations climb, long-term outlook steady
The ECB noted that inflation expectations over shorter time horizons have risen sharply, even as longer-term expectations remain stable.
“Longer-term inflation expectations remain well anchored, although inflation expectations over shorter horizons have moved up significantly,” the ECB said.
The bank emphasised that the ultimate impact on inflation and growth will depend on how long energy prices remain elevated and the extent of indirect effects across the economy.
Policy stance remains data-dependent
The Governing Council reiterated its commitment to a flexible and data-driven approach to monetary policy.
It said decisions will be taken on a meeting-by-meeting basis, depending on incoming economic and financial data.
The ECB also stressed it is not pre-committing to any specific rate path, keeping its options open amid heightened uncertainty.
Despite holding rates steady, investors expect further tightening.
Markets are pricing in three rate increases over the next 12 months, which could take the deposit rate to 2.75%.
Key rates unchanged, balance sheet continues to shrink
The ECB confirmed that all three of its key interest rates remain unchanged.
The deposit facility stands at 2.00%, while the main refinancing operations rate is at 2.15%, and the marginal lending facility is at 2.40%.
The central bank also said that its asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) portfolios are continuing to decline at a measured pace, as it no longer reinvests proceeds from maturing securities.
ECB signals readiness to act if needed
The Governing Council said it remains prepared to adjust its policy tools if necessary to ensure inflation returns to its 2% target over the medium term.
It also highlighted the availability of the Transmission Protection Instrument, designed to address disorderly market conditions that could disrupt monetary policy transmission across euro area countries.
Investors are now focusing on Lagarde’s upcoming press conference for further signals on the ECB’s policy outlook and assessment of the evolving economic risks.
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