The European Central Bank (ECB) has pledged to keep its key interest rate at 2% but is also prepared to raise it if developments in the Middle East lead to a sustained rise in eurozone inflation, Reuters reported.
Oil and gas prices have risen sharply since the US and Israeli attacks on Iran, raising concerns that higher energy costs will push up consumer prices in the eurozone, which relies heavily on imported fuel.
Financial markets are currently projecting inflation to exceed 3% this year before slowly falling back to the ECB’s 2% target over the next four years. Two more rate hikes are expected by December, even if economists are yet to see a change.
Eurozone central bankers have already warned that the war will push up inflation and slow economic growth. However, the extent of the impact also depends on the duration of the conflict, and this is currently unpredictable. This means that ECB President Christine Lagarde and her colleagues are likely to stick to signaling rather than real action, confirming that they will not take hasty steps.
Ibrahim Rahbari, head of interest rate strategy at Absolute Strategy, said that
the ECB is not planning to raise interest rates anytime soon, but at the same time wants to call for vigilance and caution.
The Bank for International Settlements has reminded that central banks should look beyond temporary supply constraints, such as the currently closed Strait of Hormuz, but many ECB policymakers remember the jump in inflation caused by rising energy prices after Russia’s full-scale invasion of Ukraine in 2022, which was also initially perceived as temporary. Along with central banks around the world, the ECB has been forced to raise interest rates rapidly, and has been criticized for acting too late.
The ECB will release updated quarterly growth forecasts on the 19th of March, but they will not yet fully reflect the impact of the Iran war on energy prices. It will also offer scenarios for economic growth if the conflict in the Middle East drags on and if it ends. The Berkeley economists said the ECB could raise interest rates if crude oil prices hold around 100 dollars a barrel (about where they are now) and natural gas prices reach 70 euros per megawatt-hour (from around 55 euros per megawatt-hour on the 18th March).
Bond markets are already bracing for governments to borrow more in response to the Iran war.
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