Frankfurt (Germany) (AFP) – The European Central Bank on Thursday kept its key deposit rate unchanged at 2.25 percent but opened the door to a rise in September as fresh fighting in the Middle East threatens to send prices higher. “Yes, it was a unanimous decision,” ECB President Christine Lagarde said of Thursday’s decision to keep rates unchanged. “But I’m going to qualify that because there were some governors who asked themselves whether we should not consider a hike,” she added.
Fresh fighting in the Middle East and rising oil prices had put 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 about a fifth of the world’s oil and natural gas. Brent crude oil passed $100 a barrel as Lagarde was speaking, with markets taking fright at Iran-aligned Houthi rebels claiming attacks on Saudi oil tankers in the Red Sea. US President Donald Trump later threatened the Houthis with “major military punishment.”
Lagarde said the reports of the Houthi attacks were “alarming” but that they came too late to factor into the ECB’s decision on Thursday. Nevertheless, the situation in the Red Sea “is clearly going to have an impact and is having an impact,” she said. “We can see that on the price of Brent as it evolves almost by the hour.”
– Risk of higher inflation –
Heavily dependent on imported oil and gas, Europe can expect inflation to lift off if energy prices soar, leaving eurozone monetary policy largely at the mercy of fast-moving geopolitical events. Though the ECB had not yet seen clear evidence of energy price inflation seeping into the broader economy, Lagarde said, inflation was now seen as likelier to rise than at the central bank’s last meeting in June.
“The risks to the inflation outlook are to the upside,” Lagarde told reporters. “The energy shock could intensify further and its effects on other prices and wages could be stronger than currently expected.” She added, “The longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second round effects.”
The ECB in June became the first major central bank to raise rates after the near total closure of the strait, putting rates up a quarter of a percentage point to 2.25 percent. The memorandum of understanding signed last month by Washington and Tehran raised hopes of a durable solution to the conflict, but the resumption in fighting has sparked fears that eurozone inflation — which in June eased to 2.8 percent — might pick up again.
Hopes for a quick resolution to the conflict leading to only minor inflation now looked misplaced, Lagarde said, while stressing the uncertainty surrounding the war. “The situation can reverse so fast that it’s difficult to either affirm or challenge the materialisation of this milder scenario,” Lagarde said, referring to ECB forecasts assuming only a limited impact from the war. “As we stand now today, it looks quite unlikely, let’s face it,” she said of the more benign scenario coming to pass.
© 2024 AFP
