ECB to Hold as It Weighs Iran War’s Inflation Threat

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(Bloomberg) — The European Central Bank is set to keep interest rates unchanged as it gauges how much of an inflation shock the war in Iran will deliver.

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The deposit rate will be held at 2% on Thursday — where its been since last June — according to a unanimous Bloomberg survey. While most economists see borrowing costs staying there through year-end, traders are betting on at least one hike.

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The fighting in the Middle East is raising fears that another upswing in inflation is coming on the heels of 2022’s price spike — a prospect that’s topping the agenda as the world’s leading central banks convene this week.

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The ECB finds itself better placed than when Russia’s invasion of Ukraine last sent oil and natural gas costs surging. Even so, some policymakers are already musing about lifting rates to curb any risks to inflation, while others wonder whether the hit to economic expansion could turn out to be more concerning.

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Fresh quarterly projections are unlikely to provide much guidance as many of their inputs were gathered before the US-Israeli attacks were launched. Accompanying scenario analysis, however, will offer pointers of how bad things could get.

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President Christine Lagarde has vowed not to “rush into a decision,” but has also promised to spare Europeans from “the same inflation increases” as four years ago. She’ll face reporters at 2:45 p.m. in Frankfurt, half an hour after the policy decision and before she heads to a European Union summit in Brussels that will discuss Iran.

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Interest Rates

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Officials are stressing the importance of remaining calm over the war, arguing that it’s too soon to draw any conclusions for rates. But that hasn’t stopped some from speculating about the need — and timing — of potential hikes. 

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Estonia’s Madis Muller said the probability of the next move being an increase has risen, while Slovakia’s Peter Kazimir told Bloomberg that “a reaction by the ECB is potentially closer than many people think.” 

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What Bloomberg Economics Says…

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“The ECB will likely be more inclined to act with words than with rates at the next meeting. Markets may be pricing insurance against a replay of 2022, but in our view the bar for actual tightening still appears high.”

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—Simona Delle Chiaie, chief euro-area economist. Click here for full  INSIGHT 

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Traders are pricing one or two quarter-point increases this year. Only 7% of analysts in a March 6-11 survey anticipated a December hike, however.

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“It makes a lot more sense to signal vigilance, signal even hawkishness at this stage and hope that they don’t need to act,” Isabelle Mateos y Lago, chief economist at BNP Paribas, told Bloomberg Television on Wednesday.