Frankfurt (Germany) (AFP) – The European Central Bank is expected to hold interest rates steady again on Thursday as policymakers weigh concerns about higher inflation triggered by the Middle East war against worries about weakening growth. Energy costs have spiked since the near-total closure of the Strait of Hormuz, through which about a fifth of the world’s oil and gas usually passes, following the outbreak of the US-Israeli war against Iran. Eurozone inflation is already picking up — it jumped to three percent in April, above the ECB’s two-percent target — but the central bank appears reluctant to quickly hike rates, fearing higher borrowing costs could weigh on the region’s already lacklustre growth.
The ECB will thus keep its key deposit rate at two percent, where it has been since June last year, as it waits to see how the war plays out, analysts believe. The central bank for the 21-nation euro area announces its rate decision at 1215 GMT. Italian bank UniCredit wrote in a note that it did not “see the urgency” for the Frankfurt-based institution to act, particularly as inflation was around the ECB’s target before the conflict. “The weakening of the outlook for demand, particularly for private consumption, reinforces the case for the ECB to be patient,” it said. Eurozone economic growth slowed to 0.1 percent in the first three months of the year, official data showed Thursday, while figures since the outbreak of the war have pointed to falling consumer and investor confidence and weakening business activity.
Other central banks are also taking a cautious approach. The Federal Reserve held interest rates steady Wednesday, its third pause in a row, as it also waits for the full impacts of the war to become clear. The Bank of England froze borrowing costs too after its meeting Thursday, but cut its forecasts for UK growth this year and next. While expectations of a swift eurozone rate hike have been tempered, some are now pencilling one in for the ECB’s June meeting. All eyes will be on President Christine Lagarde’s post-rate call press conference for clues as to the path forward. “Any hints about a June move will be taken on board,” said ING bank economist Carsten Brzeski.
Much of the inflation and growth outlook depends on whether Iran and the United States can come to a lasting agreement that secures transit of energy supplies through the Strait of Hormuz, a factor over which the ECB has no control. Speaking in Berlin earlier this month, Lagarde said the institution was facing “double uncertainty” in that it was unclear both how long the shock would last and what its effect on the broader economy would be. ECB officials have been keen to stress that the difference between the situation now and that after Russia’s invasion of Ukraine in 2022, when the central bank was criticised for moving too slowly to respond to surging inflation. At that time, an energy shock coupled with post-pandemic supply chain woes and tight labour markets pushed eurozone inflation to record highs.
But for now, ECB officials are “not in a rush”, Bank of Latvia governor Martins Kazaks, a member of the ECB’s rate-setting governing council, told The Financial Times last week. “We still have the large luxury of collecting data and forming our view.”
© 2024 AFP
