(March 19): The European Central Bank (ECB) kept interest rates unchanged for a sixth meeting as it warned that the war in Iran could shift its expectations for inflation and the economy.
The deposit rate was left at 2% on Thursday — as predicted by all analysts in a Bloomberg survey. Officials said that leaves them well positioned, reiterating in a statement that they will act one meeting at a time.
“The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth,” the ECB said. “It will have a material impact on near-term inflation through higher energy prices. Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy.”
With oil and gas markets getting another jolt earlier in the day, it said once again that it’s “determined to ensure that inflation stabilises at the 2% target in the medium term”.
Traders maintained bets on rate hikes, fully pricing two quarter-point increases this year with about a 50% chance of a third. German bonds held earlier losses, with two-year yields up 11 basis points at 2.56%. The euro traded around 0.4% higher against the dollar at US$1.1500.
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While the US has pledged to secure a swift end to the war, the violence is escalating with strikes on critical energy infrastructure as policymakers already on high alert were meeting.
ECB officials are better placed than when Russia invaded Ukraine in 2022. But some are already raising the prospect of hikes — even with output also looking vulnerable, stoking stagflation fears.
A new quarterly outlook, based on inputs that ran until March 11 to account for the start of the war, pointed to faster inflation and slower growth.
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Separate 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.
Full scenarios will be published at 3.45pm in Frankfurt along with the projections.
Other major central banks are also in wait-and-see mode: The Bank of England and the Bank of Japan kept benchmark rates unchanged earlier on Thursday after the US Federal Reserve sat tight on Wednesday.
How badly Europe is affected by the the fighting hinges on its duration — still the biggest unknown. The European Union (EU) has warned inflation could surpass 3% in 2026 if Brent oil remains near US$100 ($128.05) a barrel and gas prices stay elevated for a prolonged period. Some economists see it even rising above 4% if problems persist.
President Christine Lagarde will offer her thoughts at a news conference at 2.45pm before she travels to Brussels to attend an EU summit discussing the situation in the Middle East.
While Lagarde and other officials stressed they won’t permit a repeat of the last inflation shock, most also oppose rushing to act. They highlighted differences to four years ago, when pent-up demand following the pandemic lifted demand and borrowing costs were below zero.
The Bank for International Settlements warned that a lengthy war could rock financial markets, force costs on governments and dislodge inflation expectations. Lacking clarity on when events in Iran will cool, however, the International Monetary Fund advised policymakers to stay nimble.
Uploaded by Tham Yek Lee
