ECB keeps rates on hold and warns about Iran war hit

[FRANKFURT] The European Central Bank (ECB) kept interest rates on hold on Thursday (Apr 30), and warned that the war in Iran was fuelling an energy-led rise in eurozone inflation while taking a toll on economic activity.

The central bank for the 21 countries that share the euro kept the rate it pays on bank deposits at 2 per cent, as economists had expected.

President Christine Lagarde signalled the ECB will consider a possible interest-rate hike in June.

“We made an informed decision on the basis of yet insufficient information,” she said. “We debated the decision that we have unanimously taken today, but we also debated at length, and in depth, a decision to possibly hike.”

Asked whether the June meeting will bring a rate increase – as investors and analysts currently expect – she said the next six weeks “will be the right time” to assess the economy “in order to make an informed decision on verified and revisited information”.

The ECB said: “While the incoming information has been broadly consistent with the governing council’s previous assessment of the inflation outlook, the upside risks to inflation and the downside risks to growth have intensified.

“The longer the war continues and the longer energy prices remain high, the stronger the likely impact on broader inflation and the economy.”

Inflation in the eurozone is already above the ECB’s 2 per cent target and is expected to rise in the coming months.

Meanwhile, growth is showing some signs of weakness.

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“Longer-term inflation expectations remain well-anchored, although inflation expectations over shorter horizons have moved up significantly,” the ECB noted.

Investors expect the central bank to raise the deposit rate three times in the coming 12 months to 2.75 per cent.

With Thursday’s decision, the ECB also kept the rate at which banks can borrow at its weekly and daily auctions at 2.15 per cent and 2.4 per cent, respectively. REUTERS, BLOOMBERG