ECB Set to Hold Interest Rates as It Bides Time on Iran Response

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(Bloomberg) — The European Central Bank is set to keep interest rates unchanged on Thursday as it continues to calibrate its response to the Iran war’s economic fallout.

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Despite soaring energy costs pushing euro-zone inflation well above target, the ECB will leave its deposit rate at 2% – where it’s been since June 2025 – according to a unanimous survey of economists.

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Rather than the immediate jolts to oil and natural gas prices, policymakers are focused on the medium-term consequences, which remain less clear. President Christine Lagarde said last week that the “double uncertainty” around the duration of the shock and the breadth of pass-through argues for more data — signaling the ECB is in no rush to act.

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That’s also the case at the world’s other major central banks. The Federal Reserve held borrowing costs on Wednesday and the Bank of England is likely to follow today.

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At the ECB, such patience won’t last, according to economists and traders who both predict a quarter-point hike at June’s meeting, and markets now fully pricing two additional ones after that before the year is out. Lagarde is sure to face questions on the path for monetary policy at a 2:45 p.m. press conference — half an hour after the rate announcement.

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“The challenge for the ECB and most other central banks is that they may have to choose between inflation and recession,” said Spyros Andreopoulos at Thin Ice Macroeconomics. “How much leeway they have to ‘look through’ the energy shock will depend on the anchoring of inflation expectations.”

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Interest Rates

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Most policymakers say that even after two months of fighting it’s too soon to draw any firm conclusions for rates, though some — including Bundesbank President Joachim Nagel — have insisted no outcome should be excluded in April.

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Indeed, uncertainty about whether a fragile ceasefire can become a lasting peace — and about the damage to inflation and growth already inflicted on the 21-nation region — is keeping the idea of a rate hike further down the road on the table.

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In March, Lagarde said the choice isn’t just between “looking through” a temporary energy shock and reacting forcefully if inflation deviates significantly and persistently from 2%.

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“If the shock gives rise to a large though not-too-persistent overshoot of our target, some measured adjustment of policy could be warranted,” she said.

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“From the Governing Council’s perspective, moderate rate increases would aim to keep inflation expectations firmly anchored and prevent meaningful, indirect and second-round effects, while limiting the damage to economic activity and the labor market,” economists at UniCredit said in a note to clients.