ECB Holds Rates Steady, Revises Economic Forecasts Amid 'Significant Uncertainty' Due To Iran War

(RTTNews) - The European Central Bank left its key interest rates unchanged on Thursday, as expected, for a sixth policy session in a row amid the significant uncertainty caused by the war in the Middle East and raised the inflation forecasts for euro area as policymakers remain concerned about the impact of surging crude oil price, and expressed their readiness to act if needed.

The Governing Council, led by ECB President Christine Lagarde, left the benchmark interest rate - the deposit rate, steady at 2 percent. The refinancing rate was left unchanged at 2.15 percent and the marginal lending rate at 2.40 percent.

"The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth," the central bank said in a statement. "It will have a material impact on near-term inflation through higher energy prices."

The intensity and duration of the conflict in the Middle East shall determine the impact of high energy prices on inflation and the economy, the ECB added.

"The Governing Council is well positioned to navigate this uncertainty," the ECB said. Policymakers are "closely monitoring" the situation and will continue with the data-dependent approach in setting the monetary policy, the bank added.

The ECB staff again raised the inflation projections for Eurozone in the latest forecasting round, mainly due to the Iran war and its effect on energy prices. Headline consumer price inflation is now seen to average 2.6 percent this year, 2.0 percent next year and 2.1 percent in 2028. The projection for this year was substantially revised up from 1.9 percent seen in December, when the bank had forecast 1.8 percent and 2.0 percent for the subsequent years.

The latest projections incorporated information up to March 11, which is a later cut-off date than usual, the ECB said.

Core inflation projections were raised to 2.3 percent for this year, 2.2 percent next year and 2.1 percent in 2028, mainly owing to higher energy prices feeding into inflation excluding energy and food.

Euro area growth forecasts, meanwhile, were revised down this time to 0.9 percent this year, 1.3 percent next year and 1.4 percent in 2028. In December, the bank had lifted the projections to 1.2 percent this year, 1.4 percent next year and also in 2028.

The downward revision to growth projections reflects the global effects of the war on commodity markets, real incomes and confidence, the ECB said. The bank expects low unemployment, solid private sector balance sheets, and public spending on defence and infrastructure to continue to underpin growth.

"The impact [of the Middle East conflict] would be even more pronounced in alternative scenarios with a more severe and prolonged energy shock," Lagarde said in the policy statement. In a severe scenario where higher energy prices would have a long-lasting effect, the euro area economy could sink into a technical recession this year, according to the ECB staff analysis.

The risks to the inflation outlook are tilted to the upside, especially in the near term, the bank said.

"All in all, a rate hike is not yet on the table, but today's meeting clearly marks a hawkish pivot," ING economist Carsten Brzeski said.

The economist noted that the bar for a rate hike seems to be higher than markets have currently priced in, given that the starting position for the ECB is currently very different from in 2022, when energy prices surged due to the supply shock caused by the Ukraine war that pushed inflation in Europe into double-digits. Now, interest rates are higher, and inflation and inflation expectations are much lower than in 2022, Brzeski added.