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ECB keeps rates on hold, monitoring Iran energy shock
Economy
In deciding to keep its key deposit rate unchanged at 2.25%, the ECB said the energy price outlook is "highly volatile".
The European Central Bank left interest rates unchanged, as expected, on Thursday, warning of uncertainty surrounding the energy price shock caused by the ongoing military conflict in the Middle East.
In deciding to keep its key deposit rate unchanged at 2.25%, the ECB said the energy price outlook is "highly volatile," currently "close to the baseline scenario" of its June staff forecasts and well above pre-conflict levels.
"Uncertainty remains high, and the full inflationary impact of the energy shock has not yet fully manifested itself," the ECB wrote in a statement, adding that its Governing Council, which is responsible for setting rates, "is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects."
Last month, the ECB raised its deposit rate by 25 basis points to 2.25%, becoming the first major central bank to do so, reassuring markets of its readiness to act to contain inflationary pressures linked to the war in Iran.
Tehran has again taken steps to block tanker traffic through the Strait of Hormuz, a vital waterway off Iran's southern coast through which roughly a fifth of the world's oil and liquefied natural gas passes. Meanwhile, Iran-backed Houthi rebels in Yemen claimed responsibility for attacks on two Saudi tankers in the Red Sea—the first since the militia announced a blockade of Saudi vessels this week. Brent crude futures, the global oil benchmark, rose above $98 per barrel on Thursday. In its June rate decision, the ECB noted that the conflict that began with the joint US-Israeli attack on Iran in late February had created "inflationary pressure." Raising rates, the central bank argued then, was a "credible" step under a range of scenarios "describing how the shock could develop and impact the medium-term outlook."
Consumer price growth in the 21-member eurozone is currently running at nearly 3% year-on-year, well above the ECB's 2% target. This, in turn, has raised concerns among ECB officials that workers will begin demanding higher wages, fueling a persistent price spiral.
The ECB now forecasts average headline inflation of 3% this year, 2.3% in 2027, and 2% in 2028. Previously, the ECB had forecast these figures at 2.6%, 2%, and 2.1%, respectively. Meanwhile, eurozone growth forecasts have been sharply reduced. Gross domestic product in the region is now estimated at 0.8% this year, down from previous forecasts of 0.9%.