ECB set to hold rates steady with eye on Iran crisis

BRUSSELS

The European Central Bank is expected to hold interest rates steady again this week as it waits to see if the inflation spike triggered by the Middle East war will prove temporary or begin to weigh on growth.

Markets ramped up their bets on a rate hike after the U.S.-Israeli war on Iran sparked a global energy shock, which is already pushing up eurozone consumer prices.

Inflation in the 21-nation single currency area jumped to 2.6 percent in March, above the ECB's two-percent target, and the bank has warned it could surge far higher in a worst-case scenario.

ING economist Carsten Brzeski said the ECB's mantra before the war — that it was in a "good place" on rates — was "no more."

"The bank is back in crisis mode, shifting its focus from longer-term projections to actual developments and back to a 'driving at sight' approach," he said.

Still, economists expect the central bank not to make any moves at its meeting on April 30 and keep its benchmark deposit rate at two percent, where it has been since June last year, as it waits to see how the war plays out.

Despite the ghosts from 2022, when the ECB was criticised for moving to slowly to raise rates as inflation surged, policymakers have signalled they are not in a hurry.

"We 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," he added.

Rate increases would also weigh on the lacklustre eurozone economy, whose crucial manufacturers in particular face new pressure from the energy shock.

A survey released last week showed that eurozone business activity contracted for the first time in 16 months in April due to the war's impact.

In the U.S., economists have pushed back their expectations of rate cuts as the Iran energy shocks adds to inflationary pressure, and the Federal Reserve is also expected to keep rates on hold when it meets tomorrow.

Much comes down to whether Iran and the U.S. can come to a lasting agreement that secures Gulf oil and gas supplies through the Strait of Hormuz, a factor over which the ECB has no control.

All eyes will be on ECB President Christine Lagarde's press conference after the meeting for clues about the outlook for rates.

But she is likely to repeat language of recent weeks that the bank is "well positioned" to deal with the fallout from the war, and refuse to be drawn on future decisions.

Most economists believe the ECB will not take any action on rates just yet.

The situations now and in 2022 are "very different," Oddo BHF economist Bruno Cavalier said.

"The conditions for a surge in non-energy prices and wages are not in place," he added. "The ECB has the luxury of doing nothing."