The European Central Bank on Thursday kept interest rates where markets expected, holding the rate on its key deposit facility at 2.0% and leaving the rates on its main refinancing operations and marginal lending facility at 2.15% and 2.4%, respectively.
In the policy statement accompanying the decision, governing council members pointed to an escalation in Middle East hostilities, saying a joint U.S.-Israeli assault on Iran has made the outlook "significantly more uncertain." The statement singled out the potential for higher inflation and a weakened growth trajectory as primary concerns.
Energy markets have already reacted to the wider conflict. The ECB noted that prices, especially for natural gas, "have rocketed higher" after the fighting expanded to include strikes on facilities in major Persian Gulf producing countries such as Qatar. The central bank emphasized Europe’s exposure to gas flows passing through the region and the vulnerability that poses when production sites are targeted and when shipping lanes through the Strait of Hormuz are effectively closed.
On the inflation outlook, the ECB was explicit: the fighting "will have a material impact on near-term inflation through higher energy prices," and it added that "[i]ts 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."
Despite the heightened uncertainty, policymakers stressed their ability to respond. The statement said officials are "well positioned to navigate this uncertainty" as they pursue their goal of keeping inflation in the euro area anchored at 2%.
Summary of the decision and outlook:
- Policy outcome: All three principal ECB rates held steady - deposit facility 2.0%, main refinancing 2.15%, marginal lending 2.4%.
- Geopolitical risk: A joint U.S.-Israeli assault on Iran has increased uncertainty, with particular upside risk to inflation.
- Energy channel: Natural gas prices have surged after strikes at Gulf production sites, raising near-term inflation pressures and exposing Europe’s reliance on regional gas flows through the Strait of Hormuz.
(This is a developing story. Please check back later for updates.)