The ECB avoids making a move but warns of "growing risks" of inflation due to the war
The funding body keeps interest rates at 2% for the seventh consecutive time
BrusselsThe European Central Bank (ECB) remains cautious. The banking institution has once again avoided making a move prematurely and, despite the war in Iran and the rebound in inflation, has decided this Thursday to keep interest rates at 2% for the seventh consecutive meeting. In this way, the financial entity chaired by Christine Lagarde keeps its powder dry in case the situation worsens and, in fact, has already warned of "the high uncertainty" of the Eurozone's economic future due to the war initiated by Donald Trump.
The increase in the price of money is the main tool available to the banking institution to fight inflation. And, precisely, this Thursday, the statistical institute of the European Union, Eurostat, has published that in April the year-on-year price rate was 3%, one percentage point above the target that the ECB pursues in the medium and long term.
However, an increase in interest rates also curbs economic growth and, at this point, it is already in an almost anemic state, which could still worsen due to the consequences of the conflict in the Middle East. This quarter, for example, the eurozone only grew by 0.8% compared to the same period last year (Spain has done much better, at 2.7%), according to preliminary data also published this Thursday by Eurostat.
The previous data on price increases already pointed to an inflationary trend in the eurozone countries: in January it was 1.7%, in February it rose to 1.9%, and in March it soared to 2.6%, which was the first time it took into account the effects of the war initiated by the United States and Israel. The very president of the monetary institution has admitted that "the risks of rising inflation and falling economic growth have intensified." "The war in the Middle East has caused a sharp increase in energy prices, which has driven inflation and affected the economic climate," Lagarde added.
An uncertain future
The President of the ECB has avoided announcing any future decisions from the upcoming meetings of the bank's Governing Council —this was Luis de Guindos's last as vice-president— and, as usual, has recalled that they will depend on the macroeconomic data available, especially those related to the risks of a consolidation of the upward price trend. In this regard, Lagarde has indicated that medium-term inflation and economic activity will depend on "the intensity and duration of the energy price shock and the magnitude of its indirect effects". "The longer the war lasts and energy prices remain at high levels, the stronger the potential impact on inflation and the economy," said the French leader.
In this regard, the president of the ECB has warned of the risks posed by the rising cost of energy, both for households and businesses, which can "increase pressure on value chains" and reduce domestic consumption. Lagarde has also recommended that public aid to try to alleviate the consequences of the energy crisis be "temporary" and has pointed out that high investments by state administrations, especially in defense, infrastructure, and new technologies, can continue to be positive for the growth of the eurozone. Furthermore, the French leader has urged to accelerate the energy transition and, in this way, reduce electricity bills and stop depending on foreign powers.
Nevertheless, Lagarde has shown herself to be rather optimistic about the economic future of the euro area and has assured that, despite "inflation expectations over shorter time horizons having increased significantly," "longer-term inflation expectations continue to remain firmly anchored." In fact, core inflation —which excludes the prices of the most volatile items, such as energy and fresh food– has been falling over recent months and has already settled around the target set by the banking institution: this April it stood at 2.2%, according to preliminary data from Eurostat.
The President of the ECB also recalled that the labor market remains "resilient." According to data published by Eurostat this Thursday, unemployment in the eurozone countries remains at minimum levels and this April it fell slightly: it went from 6.3% in March to 6.2%. For these reasons, Lagarde has argued that the ECB "continues to be in a good position to navigate the current uncertainty" caused mainly by the war in Iran, while ratifying the banking organization's "commitment" to keep inflation in check.