FRANKFURT — The ecb left the Bank’s official interest rates unchanged on Thursday (ET), warning that the war in the Middle East has made the outlook “significantly more uncertain. ” The central bank published new quarterly forecasts showing inflation rising to 2. 6 percent this year from a 1. 9 percent forecast in December, and it trimmed growth projections as higher energy costs pull spending toward essentials.
Ecb holds rates steady and re-runs 2022 concerns
The European Central Bank’s policy-making Governing Council kept rates unchanged while publishing forecasts that signal a clear deteriorating tilt: headline inflation is projected at 2. 6 percent this year, higher than the 1. 9 percent forecast in December, and growth forecasts were cut to 0. 9 percent from 1. 2 percent for this year and to 1. 3 percent from 1. 4 percent for next year. The central bank said the war in the Middle East has created upside risks for inflation and downside risks for economic growth.
ECB officials stressed they are watching renewed energy-price pressure closely after the spike that threatened a rerun of 2022’s surge in prices. The institution said it is “closely monitoring the situation” and will set monetary policy as appropriate. The Governing Council also noted that central banks generally face limits in responding to supply shocks with interest-rate tools that work with long and uncertain lags.
Immediate reactions
Federal Reserve Chair Jerome Powell offered a blunt reminder of uncertainty: “The thing I really want to emphasize is that nobody knows, ” Jerome Powell, Federal Reserve Chair, told reporters following the U. S. central bank’s decision to leave rates unchanged. Market participants have priced bets that policymakers might lift the key deposit rate twice this year toward 2. 5 percent, but central bankers cautioned against rushing to conclusions.
The ECB emphasized having examined scenarios in which a longer disruption to global oil and gas supplies would push inflation above and growth below its baseline projections. That analysis framed the Governing Council’s decision to hold rates steady for now while flagging elevated risks.
Quick context and what’s next
This squeeze follows a period when headline inflation had surged in 2022 after Russia’s invasion of Ukraine, reaching about 10 percent within a year, and households were only beginning to recover purchasing power. Central banks face a policy dilemma: tightening can cool inflation but may not address supply-driven price shocks quickly, and easing risks embedding higher inflation expectations.
Looking ahead, the ECB will publish further guidance at its next press conference; they will act as appropriate if risks materialize. Investors’ expectations of future rate moves and any extended disruption to oil and gas supplies will be the key variables to watch as the ecb weighs whether to change policy in coming months.
