FRANKFURT, April 30 (Reuters) – The European Central Bank kept interest rates on hold on Thursday and warned that the war in Iran was fuelling an energy-led rise in euro zone inflation while taking a toll on economic activity.
The central bank for the 21 countries that share the euro kept the rate it pays on bank deposits at 2%, as economists expected and policymakers including President Christine Lagarde had suggested.
But it sharpened a warning about the fallout from the Iran conflict, and the associated disruptions in fuel flows through the Strait of Hormuz, on the euro zone’s economy.
“While the incoming information has been broadly consistent with the Governing Council’s previous assessment of the inflation outlook, the upside risks to inflation and the downside risks to growth have intensified,” the ECB said in a press release.
“The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy,” it added.
Inflation in the euro zone is already above the ECB’s 2% target and is expected to rise further in the coming months while growth is showing some signs of weakness.
“Longer-term inflation expectations remain well anchored, although inflation expectations over shorter horizons have moved up significantly,” the ECB noted.
Investors expect the ECB to raise the deposit rate three times in the coming 12 months to 2.75%.
With Thursday’s decision, the ECB also kept the rate at which banks can borrow at its weekly and daily auctions at 2.15% and 2.40%, respectively.
Investors’ attention will now turn to ECB President Christine Lagarde’s news conference starting at 1245 GMT.
(Reporting by Francesco Canepa; Editing by Hugh Lawson)
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