European Central Bank kept its deposit rate unchanged at 2.00%, as widely expected, but the statement highlighted a more complex risk environment. Policymakers acknowledged that “the upside risks to inflation and the downside risks to growth have intensified,” signaling that the balance of risks has shifted as the energy shock deepens.
At the center of the ECB’s assessment is the impact of the Middle East conflict on energy markets. The Governing Council noted that the war has “led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment.” The key uncertainty now lies in how persistent this shock proves to be. “The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy,” the statement warned.
Despite the near-term pressure, the ECB emphasized that underlying conditions remain relatively stable. The Eurozone entered this period “with inflation at around the 2% target,” and the economy has shown resilience in recent quarters. Importantly, “longer-term inflation expectations remain well anchored,” even as short-term expectations have moved up significantly, reflecting the immediate impact of energy costs.
Looking ahead, the ECB maintained a flexible stance, reiterating that it will follow a “data-dependent and meeting-by-meeting approach” and is “not pre-committing to a particular rate path.” This keeps all options open, with policy decisions hinging on incoming data, the evolution of inflation risks, and the strength of monetary transmission. While the ECB stopped short of signaling a near-term move, the tone suggests that rising inflation risks will remain firmly in focus.
