The ECB is keeping its options open and maintaining interest rates despite the Iran-Contra affair.

BrusselsCaution at the European Central Bank (ECB). Despite the Iran nuclear deal and rising fossil fuel prices, the ECB's Governing Council unanimously agreed at its meeting this Thursday not to change interest rates and keep them at 2%. sixth consecutive timeHowever, the president of the financial institution, Christine Lagarde, has opened the door to future interest rate hikes. The French leader warned that the Middle East conflict "has created upside risks to inflation and downside risks to economic growth," making the economic outlook "much more uncertain." "The war will have a significant impact on inflation in the short term due to rising energy prices," the ECB president noted at a press conference. However, the ECB has decided not to take action. "The Governing Council is well positioned to navigate this uncertainty," Lagarde assured. The institution emphasizes that inflation is currently under control, around the 2% target set by the bank itself, and asserts that expectations for price increases "in the longer term are firmly anchored and the economy has shown resilience in recent quarters."

However, the organization is opening the door to future interest rate hikes, and warns that it is "closely monitoring the situation" and that monetary policy will depend on the data it obtains from "the assessment of the effects of the war": "Inflation and the risks to which it is subject." "Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy," Lagarde added.

However, the ECB has already substantially revised its inflation forecasts upwards due to rising energy prices, particularly for this year. Specifically, the financial institution estimates that the price increase will be 2.6% in 2026. In February, for example, the year-on-year price increase rate was 1.9%, according to data from Eurostat, the European Commission's statistical office. Regarding 2027 and 2028, the financial institution forecasts similar percentages to those mentioned above, at 2% and 2.1%, respectively. Meanwhile, core inflation—which excludes energy and fresh food, which have more volatile prices—is expected to remain at 2.3% this year, 2.2% next year, and 2.1% in 2028.

Conversely, the ECB has revised its economic growth forecasts downwards, placing them at 0.9% this year, 1.3% in 2027, and 1.4% in 2028. "This is due to the effects of the war on the commodity market, real incomes, and confidence worldwide," La argued. However, these percentages have not decreased substantially "because of the low unemployment rate" and "public spending on defense and infrastructure."

However, Lagarde warned that a prolonged war in Iran and the energy crisis would put inflation "above" and economic growth "below" the economic projections published by the ECB this Thursday, just nineteen days after the United States and Israel attacked the regime of the ayatollahs.

It's worth remembering that raising interest rates is the main tool the Frankfurt-based institution has to curb inflation, which skyrocketed after the pandemic and the start of the war in Ukraine. However, it's a double-edged sword and also causes an economic slowdown. Therefore, the central bank always seeks a balance, and faced with stable inflation around 2% and a healthier economy than expected, it has opted to keep interest rates at 2%.

Frankfurt follows Washington's lead

The ECB's Governing Council decided to take no action at its first meeting since the start of the trade war, thus aligning itself with its US counterpart, the Federal Reserve (Fed). The US central bank kept interest rates unchanged on Wednesday. The Fed set interest rates between 3.5% and 3.75% for the second consecutive time, also opening the door to future rate hikes. Thus, the central bank continues to resist pressure from Donald Trump, who demands that the Fed lower interest rates without considering the potential impact on inflation.