Volkswacht Bodensee - ECB warns of risks from Mideast war as it holds rates

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 concerns about inflation have to be balanced against the risk of curbing lacklustre growth by making borrowing more expensive.

"The upside risks to inflation and the downside risks to growth have intensified," the ECB said in a statement announcing its decision.

"The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy," it said.

Ahead of the meeting, analysts had expected the ECB to keep its key deposit rate at two percent, where it has been since June last year, as the bank waits to see how the war plays out.

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.

- Looking to June -

Other central banks have also taken a cautious approach.

The Federal Reserve held interest rates steady Wednesday, faced with its own difficult mix of a weakening labour market and rising inflation, marking its third pause in a row.

The Bank of England also froze borrowing costs after its meeting Thursday at the same time as cutting its forecasts for UK growth this year and next.

All eyes will be on President Christine Lagarde's post-rate call press conference for clues as to the path forward, with some betting on a rate rise in June as inflation picks up.

"Any hints about a June move will be taken on board," ING bank economist Carsten Brzeski said ahead of the meeting.

- 'Not in a rush' -

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 the difference between the situation now and that after Russia's invasion of Ukraine in 2022, when some criticised the central bank for moving too slowly in its response 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.

Bank of Latvia governor Martins Kazaks, a member of the ECB's rate-setting governing council, had told the Financial Times ahead of the decision that the bank was "not in a rush".

"We still have the large luxury of collecting data and forming our view", he said.

B.Baumann--VB