The European Central Bank (ECB) left interest rates unchanged on Thursday but hinted that a rate increase could come as soon as June.
Policymakers kept the bank’s key deposit rate at 2 per cent, where it has been since June 2025, while warning “the upside risks to inflation and downside risks to growth have intensified” as a result of the Iran war.
At a press conference, president Christine Lagarde said the final decision to hold rates was unanimous while noting policymakers discussed “at length” the possibility of a rate hike.
“We made an informed decision based on as-yet insufficient information,” she said, adding that their next meeting in June would be the “right time” for a new assessment.
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“There is such uncertainty that we need to understand and revisit that at our next policy meeting,” Lagarde said. “We are certainly moving away from our baseline,”she said of a scenario built around an early end to the war and a limited energy shock.
Several analysts are predicting a quarter-point rate hike at the ECB’s next meeting in June and markets are pricing in two to three rate increases this year.
Euro zone inflation has risen well above the bank’s 2 per cent target level since the start of the Iran war and policymakers are worried the longer the crisis lasts the more the price shock will become embedded in the economy with second-round effects spilling out into other sectors such as food and construction.
For the moment, the bank is adopting a wait-and-see approach similar to the Bank of Japan and the US Federal Reserve which also kept rates on hold this week. Earlier on Thursday the Bank of England also left interest rates unchanged.
The dilemma for the ECB is in trying to stem the current tide of inflation with higher interest rates, it risks dampening already fragile growth and pushing the bloc into recession.
The euro zone economy barely grew in the first quarter, even before the war had any meaningful impact.
Lagarde, however, dismissed suggestions the bank was facing a 1970s-style “stagflation” problem.
“That is a term better to be parked in the 1970s,” she said in response to a question. Surveys this week showed business sentiment is plunging quicker than predicted, the services sector is deteriorating, corporate profits are dropping, exports are still reeling from tariffs, and banks plan to curtail firms’ access to credit.
“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 ECB said in a statement.
Roman Ziruk, senior market analyst at global financial services firm Ebury, said: “Today’s ECB meeting delivered a reassuring message, suggesting a measured approach to monetary tightening amid considerable uncertainty due to the Iran conflict.”
“The communications carried both dovish and hawkish undertones,” he said.
“Lagarde confirmed that the situation is ‘certainly moving away’ from the baseline scenario and acknowledged that a rate hike had been discussed at today’s meeting, while emphasising that the decision to hold was unanimous,” he added.
Danske Bank’s Antti Ilvonen said: “Even if policy rate hikes can do little about the first order cost pressures stemming from the war, we believe the ECB will focus on ensuring inflation expectations remain well anchored by modestly tightening its policy,”
