ECB holds rates steady, warns of inflation and growth risks from Middle East war

The European Central Bank on Thursday left its three key interest rates unchanged, warning that the Middle East war has increased upside risks to inflation and downside risks to economic growth.

The European Central Bank said the deposit facility rate, main refinancing rate and marginal lending rate would remain at 2%, 2.15% and 2.40%, respectively, in line with market expectations.

“While 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 a statement.

The Governing Council reiterated its commitment to ensuring inflation returns to its 2% target over the medium term.

The ECB said the war in the Middle East has driven a sharp increase in energy prices, pushing up inflation while weighing on confidence and economic activity.

“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 added.

The bank noted that the euro area entered the period of rising energy prices with inflation close to its 2% target and an economy that had shown resilience in recent quarters.

While longer-term inflation expectations remain well anchored, short-term expectations have risen significantly.

Energy markets have been under pressure since late February, when conflict escalated in the region, raising concerns over oil and gas flows through key routes such as the Strait of Hormuz, a critical global energy chokepoint.