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The European Central Bank has kept interest rates at 2 percent but left the door open to increases at future meetings as it warned that risks to inflation and growth from the conflict in the Middle East had “increased.”
“The war in the Middle East has led to a sharp increase in energy prices, driving up inflation and putting pressure on economic sentiment,” said ECB President Christine Lagarde.
“The longer the war continues and the longer energy prices remain high, the stronger the likely impact on broader inflation and the economy.”
The decision, which was in line with economists’ expectations, came just hours after data showed euro zone inflation rose more than expected to 3 percent in April, the highest level since September 2023, as conflict in the Middle East pushes up energy prices.
GDP growth in the 21-member euro zone slowed to 0.1 percent in the first three months of the year, separate data showed on Thursday, compared with 0.2 percent in the previous quarter.
While the ECB pointed to a recent rise in short-term inflation expectations, it emphasized that longer-term expectations remained “well anchored”, indicating that there is not necessarily an urgent need for dramatic monetary policy responses. The ECB will set the next interest rates in June.
“It seems like the ECB is in no hurry to raise rates,” said Carsten Brzeski, head of macroeconomics at ING, adding that early rate hikes could lead to a situation similar to 2011, when the ECB acted too quickly and pushed the economy “further into stagnation.”
Deutsche Bank economist Mark Wall said policymakers were keeping all options open, stressing that the central bank’s statement “does not pre-commit the ECB to a rate hike in June” and “does not prevent” it from hiking next month.
Claus Vistesen, economist at Pantheon Macroeconomics, called the previous inflation figures “nasty” and warned that the situation “will soon become even worse”.
Oil prices rose above $125 a barrel on Thursday, the highest level since the outbreak of the war with Iran.
The ECB this week joined a wave of top central banks in keeping rates unchanged, betting they need more time to assess whether the energy shock from Iran’s war will lead to a prolonged period of high inflation.
The US Federal Reserve, the Bank of Japan, the Bank of England and the Bank of Canada all left their policies unchanged at their respective meetings.
Before the ECB’s decision, traders had priced in a three-quarter-point increase in eurozone borrowing costs this year.
Data visualization by Keith Fray
