FRANKFURT, April 30 - The European Central Bank opted to leave interest rates unchanged on Thursday, reaffirming the deposit rate at 2% and underscoring the growing economic risks stemming from the conflict in Iran. Policymakers said the war is contributing to an energy-led rise in euro zone inflation and is beginning to take a toll on economic activity.
The decision to maintain the rate paid on bank deposits at 2% matched economists' expectations and followed signals from policymakers, including President Christine Lagarde. In its statement, the ECB made a pointed assessment of the conflict's impact on energy flows, citing disruptions to fuel movements through the Strait of Hormuz as a factor weighing on the region's inflation outlook.
"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 bank said in its press release. The ECB added: "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 central bank noted that inflation in the euro zone is already above its 2% target and is expected to rise further in the coming months, even as growth shows some signs of weakness. The ECB also observed a divergence in expectations: "Longer-term inflation expectations remain well anchored, although inflation expectations over shorter horizons have moved up significantly."
Alongside the deposit facility rate, the ECB left unchanged the rates for its borrowing operations - 2.15% at the weekly auction and 2.40% at the daily auction. Market participants are pricing in three increases in the deposit rate over the next 12 months, taking the level to 2.75%.
Investors and market watchers are set to focus on ECB President Christine Lagarde's news conference, scheduled to start at 1245 GMT, for further detail on the bank's outlook and policy guidance.
Context and implications
The ECB's statement ties the trajectory of inflation and growth directly to developments in the Middle East and to energy price dynamics. It signals that while longer-term expectations remain anchored, near-term pressures have increased and could prompt a reassessment of policy if the conflict and energy shocks persist.