The European Central Bank on Thursday maintained its main deposit rate at 2%, a move that was widely anticipated by markets. While incoming data were described as "broadly consistent" with the bank's earlier assessment of the inflation outlook, policymakers signalled mounting concern over a spike in energy costs tied to the Iran war and its effect on the eurozone economy.
In its policy statement, the ECB highlighted that fighting in the Middle East has produced a sharp rise in oil and gas prices, "pushing up inflation and weighing on economic sentiment." The bank warned that the ultimate effect of the conflict on medium-term inflation and activity hinges on the intensity and duration of the energy price shock and the scope of any indirect or second-round effects.
"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 ECB said. "The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy."
ECB officials reiterated that future rate choices will be guided by their assessment of the inflation path and the balance of risks around it, but stressed they are not pre-committing to a specific sequence of rate moves. The Governing Council said it will calibrate borrowing costs to help keep inflation sustainably at 2%.
Analysts noted the central bank's cautious stance. "The ECB has kept interest rates on hold and stuck to a steady-hand approach, acknowledging increasing stagflationary pressures in the eurozone," analysts at ING said in a note, referencing a mix of elevated inflation and weak growth.
Recent official data underscore the policy dilemma. A preliminary Eurostat reading showed consumer price inflation across the 21 euro-area countries at 3.0% in the twelve months to April, up from 2.6% in March and in line with economists' expectations. Energy costs were identified as the main contributor to the acceleration.
For weeks, oil and gas prices have been trading significantly above the levels seen before the start of the Iran war in late February, according to the ECB's statement. That rise in energy costs has been a key factor lifting overall consumer price growth in April, potentially strengthening the case for rate increases later in the year should elevated inflation persist.
On the growth front, the eurozone economy showed tepid expansion. An initial estimate of gross domestic product for the currency area indicated quarter-on-quarter growth of 0.1% for the January to March period. That outturn fell short of economists' expectations of 0.2%, which would have matched the economy's expansion in the final quarter of 2026.
Overall, the ECB's decision to pause reflects a balancing act between the still-elevated inflationary pressure driven by energy costs and the signs of slowing economic momentum. Policymakers made clear that the path of rates will depend on how inflation dynamics evolve and on the persistence of the energy shock originating from the Iran war.