ECB Holds Rates Steady as Iran War Raises Inflation Risks

The European Central Bank kept interest rates unchanged at its April meeting, with the main refinancing rate at 2.15% and the deposit facility at 2.0%, as policymakers adopted a cautious stance, assessing the impact of the Iran war on inflation and growth. While the ECB remains well-positioned to navigate uncertainty, officials noted that upside risks to inflation and downside risks to growth have intensified. They emphasized that longer-term inflation expectations remain anchored, though shorter-term expectations have risen significantly. At the post-meeting press conference, ECB President Christine Lagarde said the decision to hold rates was unanimous, though policymakers debated various options, including a possible hike. She added that the discussion centered on the fact that the ECB is "certainly moving away" from its baseline scenario.

The European Central Bank is expected to hold interest rates steady at its April meeting, as investors adopt a wait-and-see approach to gauge the impact of the Iran war on inflation and economic growth. ECB President Christine Lagarde and board member Isabel Schnabel have signaled the bank will take its time before deciding on further tightening, with investors closely watching the press conference for any additional cues. Eurozone inflation accelerated to 2.6% in March, the highest since July 2024, driven by rising energy costs. Despite the cautious stance, markets are fully pricing in three ECB rate hikes in 2026, with the first potentially arriving as early as June.

ECB policymakers acknowledged that the war in the Middle East had made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for growth, although the central bank was well positioned to navigate this uncertainty, minutes from the March ECB meeting showed. The environment could change rapidly, and uncertainty regarding both the war and its economic impact was likely to remain very high in the future, but it was also possible that this uncertainty might be resolved over the coming weeks or months. Although the near-term inflation outlook had been revised up substantially, inflation was still seen to stabilise around the 2% target over the medium term. Against this background, keeping rates unchanged in March while retaining optionality for future meetings was a prudent approach. The meeting-by-meeting approach without any pre-commitment to a particular rate path was especially helpful at this juncture.