ECB Keeps Rate Steady to Gauge Iran War Impact on Inflation

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(Bloomberg) — The European Central Bank kept borrowing costs unchanged, awaiting data to judge whether price pressures unleashed by the Iran war require additional tightening. 

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The deposit rate remained at 2.25%, as anticipated by economists and investors who expect officials to follow up on June’s hike with another quarter-point move in September. 

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The ECB reiterated it won’t pre-commit but act one meeting at a time based on information as it arrives.

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“Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out,” officials said in a statement. “The Governing Council is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects.”

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Policymakers reiterated that the ECB is “well positioned” to navigate the situation. 

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Bonds were little-changed after the decision, leaving the 10-year Bund yield two basis points higher at 3.19%. It earlier touched 3.21%, the highest level since 2011, as surging oil and gas prices fuel inflation concerns.

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Wagers on where interest rates go from here were also steady. Swaps imply a quarter-point hike in September is all but certain, with another almost fully priced by year-end. The euro held losses, down 0.2% against the dollar at around $1.1390.

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The ECB’s hawkish posture preserves its status at the vanguard of Group-of-Seven central banks after it last month became the first in that club to raise rates since the Iran war began.  

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Back then, it warned that inflation triggered by the fighting was widening beyond just energy, while the economy stayed resilient. Now policymakers are weighing the need for further tightening measures. 

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The September meeting is widely seen as a natural point to deliver such a move if required, backed by new quarterly staff forecasts, inflation prints for the two prior months and more economic data including several business surveys.

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While some officials were confident earlier in July that efforts toward peace in the Middle East could limit the impact of the war on euro-area consumer prices, renewed fighting has once again reawakened such concerns.

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Energy prices have already surged, with Brent crude oil closing in on $100 a barrel as Iran-backed Houthi militants said they attacked two Saudi Arabian tankers in the Red Sea, threatening deeper supply disruptions. That risks putting renewed upward pressure on inflation that slowed to 2.8% in June.

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When hostilities resumed earlier in July, Greece’s Yannis Stournaras, one of the most dovish Governing Council members, acknowledged that “we are back to square one.” His hawkish German colleague, Bundesbank President Joachim Nagel, stressed that the ECB will “maintain its vigilant stance.”

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June’s staff baseline projection anticipated 3% inflation this year, followed by a moderation to 2.3% and 2% in 2027 and 2028. But core price growth, excluding energy and food, was seen staying above the ECB’s 2% goal through 2028.