(April 16): Policymakers at the European Central Bank (ECB) are leaning towards keeping interest rates unchanged this month, postponing their verdict on whether the fallout of the Iran war warrants a response, according to people familiar with the debate.
Tighter financing conditions are helping to keep inflation expectations anchored for the moment, the people argued, adding that a rate hike wouldn’t necessarily alter market pricing much. They asked not to be identified sharing the content of private conversations.
Data arriving in the run-up to the ECB’s April 29-30 meeting won’t offer definite answers on how badly nearly two months of fighting in the Middle East have hurt economic growth, supply chains and an outlook showing inflation on track to the ECB’s 2% goal, the people said. And with peace negotiations under way, it’s still possible that any damage can be contained.
They pointed to the ECB’s late reaction in 2022 when Russia’s invasion to the Ukraine triggered a record-surge in inflation as well as its experience in 2011 when two rate hikes in the midst of the euro debt crisis had to be quickly reversed.
An ECB spokesperson declined to comment.
The war-induced surge in energy costs already pushed inflation in the 21-nation’s region to 2.5% in March, but how long this will last very much depends on the duration of the conflict. At the same time, governments and central banks have slashed their projections for economic growth, while firms are bracing for a hit to demand among their customers.
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President Christine Lagarde told Bloomberg Television this week that the ECB needs to be “completely agile” on rates, but stressed that it doesn’t have a bias toward raising them. However, investors see hikes as inevitable, betting on two quarter-point increases this year.
IMF managing director Kristalina Georgieva told Bloomberg Television on Wednesday that central banks should resist the urge to tighten borrowing costs as this could damage economic output.
Similarly, ECB Executive Board member Isabel Schnabel said that there’s no need for the ECB to rush into a decision to raise rates and Bank of France chief Francois Villeroy de Galhau stressed that “a focus on April would be premature.”
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