The European Central Bank (ECB) kept interest rates unchanged on Thursday despite the ongoing surge in energy prices.
The bank left its key deposit rate at 2 per cent – where it has been since June 2025, while warning the Iran war had led to a spike in energy prices which was “pushing up inflation and weighing on economic sentiment”.
“The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy,” it said.
The bank’s comments will add to speculation that it may lift interest rates by a quarter-point at its next meeting in June.
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Euro zone inflation has risen well above the bank’s 2 per cent target level since the start of the Iran war and policymakers are worried the longer the crisis lasts the more the price hike will become embedded in the economy with second-round effects spilling out into other sectors such as food and construction.
For the moment, the bank is adopting a wait-and-see approach similar to the Bank of Japan and the US Federal Reserve which also kept rates on hold this week. Earlier on Thursday the Bank of England also left interest rates unchanged.
The dilemma for the ECB is in trying to stem the current tide of inflation with higher interest rates, it risks dampening already fragile growth and pushing the bloc into recession.
ECB president Christine Lagarde said recently that the “double uncertainty” around the duration of the shock and the breadth of pass-through argues for more data, suggesting she believes the bank should not rush to act.
Nonetheless, several market analysts are predicting a quarter-point rate hike at the ECB’s next meeting in June and markets are pricing two to three rate increases this year.
Lagarde is expected to be questioned about the path for monetary policy at the bank’s post-rate decision press conference later.
“Even if policy rate hikes can do little about the first order cost pressures stemming from the war, we believe the ECB will focus on ensuring inflation expectations remain well anchored by modestly tightening its policy,” Danske Bank’s Antti Ilvonen said.
