ECB Holds Rates Amid War-Driven Inflation Fears
The European Central Bank held its key interest rates steady, keeping the deposit rate at 4%. Top officials warned that the longer the Iran conflict persists, the higher the risk of an energy shock that could reignite inflation while simultaneously undermining economic growth, creating an "agonizing trade-off" for policymakers.
The decision to hold rates comes as Eurozone inflation unexpectedly ticked up to 1.9% in February, just shy of the ECB's 2% target. Core inflation, which excludes volatile energy and food prices, also rose to 2.4%, signaling persistent underlying price pressures. The conflict in Iran has triggered an immediate and significant energy price shock, with shipping through the vital Strait of Hormuz slowing to a near standstill. European gas prices have surged by as much as 60% since the conflict began, while oil prices have also jumped, fueling concerns of a renewed inflation wave. Europe's energy vulnerability is particularly acute after its strategic shift away from Russian gas. The continent now competes with Asian buyers for limited global supplies of Liquefied Natural Gas (LNG), making it highly susceptible to price spikes from disruptions in the Persian Gulf. This inflationary threat is set against a backdrop of moderating economic growth. While the Eurozone economy expanded 1.4% in 2025, both the ECB and the European Commission forecast growth will slow to 1.2% in 2026, heightening the risks of stagflation. The current hold at a 2.00% deposit rate marks the fifth consecutive meeting without a change. This period of stability follows a series of eight rate cuts that began in mid-2024, which brought the rate down from a high of 4.00%. Market expectations have adjusted to the heightened uncertainty, with a full 25 basis point rate hike not priced in until early 2028. The ECB maintains a data-dependent, meeting-by-meeting approach, refusing to pre-commit to a particular rate path.
