Wire flash
FinanceECB Holds Rate at 2.25% as Middle East Conflict Drives Oil Above $98
Editorial responsibility
- No named human review is recorded for this page.
- Source reporting is collected, normalized, translated or condensed automatically when needed.
- Automatically published source-backed update
The European Central Bank (ECB) kept its key deposit rate unchanged at 2.25% during its latest meeting, citing high uncertainty and the ongoing inflationary impact of the Middle East war. Renewed fighting between Iran and the United States has slowed traffic through the Strait of Hormuz, restricting energy exports on a waterway that carries about a fifth of the world's oil and natural gas. Brent crude oil prices have risen above $98 per barrel, the highest since late May, and Iran-aligned Houthi rebels struck two Saudi oil tankers in the Red Sea. The ECB warned that the full inflationary impact of the energy shock has yet to play out and is closely monitoring the intensity and duration of the conflict. The bank faces a stagflation dilemma: cutting rates to boost growth could worsen inflation, while raising rates to tame inflation could slow growth further. Observers expect the ECB to wait for clarity on the conflict's duration before making further moves. Investors await ECB President Christine Lagarde's press conference for hints on future rate policy.
Source report
The European Central Bank (ECB) on Thursday kept its key deposit rate unchanged at 2.25%, stating it was "closely monitoring" the inflationary impact of the Middle East war amid renewed fighting.
"Uncertainty remains high, and the full inflationary impact of the energy shock has yet to play out," the lender of last resort for the 21 countries that use the euro said in a statement. "The governing council is therefore closely monitoring the intensity and duration of the shock."
Heightened Alert Over Energy Disruption
Fresh fighting in the Middle East and rising oil prices had placed the ECB on alert ahead of its rate-setting meeting. Two weeks of renewed conflict between Iran and the United States have once again slowed traffic through the Strait of Hormuz to a trickle, restricting energy exports on a waterway that in peacetime carries approximately one-fifth of the world's oil and natural gas.
The ECB in June became the first major central bank to raise rates after the near-total closure of the strait, increasing rates by a quarter of a percentage point to 2.25%.
A memorandum of understanding signed last month by Washington and Tehran had raised hopes of a durable solution to the conflict. However, the resumption of fighting has sparked fears that eurozone inflation — which eased to 2.8% in June — might pick up again.
Oil Prices and Regional Tensions
A barrel of Brent crude oil now trades at over $98, the highest level since the end of May. Iran-aligned Houthi rebels on Thursday said they had struck two Saudi oil tankers in the Red Sea.
Stagflation Risks
Rising energy prices can give rise to so-called stagflation — a nightmare combination for central banks of stagnant growth and high inflation.
- If central banks cut interest rates to boost growth during a period of stagflation, they risk further aggravating inflation.
- If they raise interest rates to tame inflation, they risk slowing growth further.
Some economists had criticized the ECB's June move as heavy-handed, drawing parallels with rate hikes in 2011 that some blame for choking off a nascent eurozone recovery after the Great Recession.
Market Expectations
Most observers had expected the ECB to keep its powder dry on Thursday and pause for now while it waits to see the outcome and duration of the latest fighting.
Investors will now be watching for any clues from ECB President Christine Lagarde in her post-rate-call press conference about the path ahead for rates, although she is typically tight-lipped.
Source
EuractivWestern
Part of this Story
ECB Holds Rates Steady Amid Middle East Conflict and Rising Oil Prices