ECB holds interest rates steady at 2%, signals possible June hike

The European Central Bank (ECB) kept its key interest rates unchanged at 2% on Thursday, matching market expectations and despite inflation risks linked to the Iran war.

However, economists widely expect the central bank to raise interest rates later this year – possibly as early as June.

“The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy,” said ECB chief Christine Lagarde in Frankfurt after the regularly scheduled meeting of its Governing Council.

The possibility of an interest rate hike had already been “discussed in depth” at the current meeting of the ECB Governing Council, she added.

This marks the seventh consecutive time that the eurozone’s monetary authorities have left interest rates unchanged.

The ECB said in a statement: “The war in the Middle East has led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment. “

Inflation has surged

Higher energy prices have already pushed up inflation across the 21-member eurozone area, with fears they could feed into broader price increases for goods and services. In April, consumer prices in the eurozone were 3.0%.

Lagarde also issued a warning to policymakers: emergency fiscal packages introduced in response to the sharp rise in energy prices should remain temporary.

“Reforms to enhance the euro area’s growth potential and accelerate the energy transition to reduce reliance on fossil fuels are more vital than ever,” she said.

“Longer-term inflation expectations remain well anchored, although inflation expectations over shorter horizons have moved up significantly,” the bank argued.

Lagarde does not expect the situation to ease at this time: in the short term, inflation will be “well above 2%,” the ECB’s target for the medium term. At this level, the central bank considers its primary objective – ensuring a stable euro and safeguarding people’s purchasing power – to have been achieved.

Several interest rate hikes expected this year

The financial markets are expecting three key interest rate hikes of 0.25 percentage points each by the end of the year. The next interest rate decision is due on June 11.

Higher interest rates would allow the ECB to keep inflation in check: this would make loans more expensive, which could curb demand and dampen inflation.

Savers would also benefit from rising key interest rates if banks pass these on to them.

With the expectation of rising key interest rates, savings rates have already gone up.