ECB holds interest rates steady at 2%

The European Central Bank (ECB) has kept its key interest rates unchanged at 2% despite inflation risks linked to the Iran war.

“The war in the Middle East has led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment. The implications of the war for medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock and the scale of its indirect and second-round effects,” the bank said in a statement online on Thursday after a Governing Council meeting.

“The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy.”

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.

Higher interest rates would make borrowing more expensive, potentially cooling demand and easing inflation, while also benefiting savers.

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

ECB President Christine Lagarde has signalled readiness to act if needed, stressing that the duration of the conflict in the Middle East will be a key factor.