European Central Bank keeps rates on hold in the face of inflation threat

The European Central Bank kept interest rates on hold at its April meeting, despite a surge in inflation in the euro zone since the war in Iran began.

The ECB’s governing council opted to hold its benchmark deposit facility rate at 2% on Thursday.

In a statement, the bank said that while its previous assessment of the inflation outlook was largely unchanged, “the upside risks to inflation and the downside risks to growth have intensified.”

It said its Governing Council remained committed to setting monetary policy to ensure that inflation stabilizes at the 2% target in the medium term.

Acknowledging that the war in the Middle East had led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment, the ECB noted that “the implications of the war for medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock and the scale of its indirect and second-round effects.”

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

It said it would closely monitor the situation and take a data-dependent and meeting-by-meeting approach to determining its monetary policy stance. Policymakers would not pre-commit to a particular rate path, it emphasized.

The euro was trading almost 0.2% higher against the dollar after the move, at $1.17.

The decision came after flash data out Thursday showed inflation in the euro zone jumped to 3% in April, driven largely by a rise in energy costs in the region.

ECB President Christine Lagarde said at the bank’s last gathering a month ago that policymakers were ready to hike interest rates even if an expected jump in euro zone inflation proved temporary.

Economists say the bank’s June meeting will be the one to watch, with a potential 25-basis-point increase to take its key interest rate to 2.25%.

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