The European Central Bank (ECB) announced on Thursday that it would keep its deposit facility rate unchanged at 2%, aligning with market expectations. The ECB refrained from providing forward guidance on future policy decisions, reiterating that it will determine the appropriate stance on a meeting-by-meeting basis, guided by incoming information.
In a statement released on Thursday, the ECB's Governing Council noted, "Upside risks to inflation and downside risks to growth have both intensified. The Governing Council remains well-positioned to navigate the current uncertainty." Since the outbreak of the conflict, ECB policymakers have consistently emphasized their readiness to act decisively if signs of a wage-price spiral emerge, though current data has not yet convinced them to take action.
The ECB is not alone in its wait-and-see stance. The US Federal Reserve held rates steady on Wednesday, and the Bank of England also decided to maintain its current policy earlier on Thursday. The ECB is also closely monitoring the conflict's impact on output. Data released shortly before the rate announcement showed that the Eurozone's Gross Domestic Product (GDP) grew by just 0.1% in the first quarter, falling short of expectations and heightening market concerns about stagflation. Policymakers stated that more time is needed to assess the full economic impact of the Middle East conflict.
Markets anticipate that ECB officials will be focused on price increases driven by rising energy costs. Eurozone inflation jumped to 3% in April, its fastest pace since the autumn of 2023. Traders currently expect the ECB to deliver a cumulative 75 basis points of interest rate hikes by the end of this year. Following the ECB's statement, traders maintained their bets on steady rates, while bonds held onto earlier gains. The yield on Germany's two-year government bond fell by 9 basis points to 2.65%. The euro held its gains against the US dollar, rising 0.2% to 1.1694.
Ahead of this week's meeting, ECB policymakers indicated that the two-month-old conflict in the Middle East and the ongoing blockade of the Strait of Hormuz have left the Eurozone's economy hovering between the ECB's baseline projections and the more pessimistic scenario presented in March. The baseline scenario assumes an average oil price of $81.3 per barrel in 2026, while the adverse scenario projects Brent crude prices approaching $120 per barrel this quarter. Data showed that international oil prices briefly exceeded $126 earlier on Thursday, reaching a four-year high.
Furthermore, ECB officials will receive new economic forecasts in June. Economists and investors expect the central bank to opt for an interest rate hike at that time. By then, uncertainties surrounding the duration and economic impact of the Middle East conflict may have diminished. Currently, the United States and Iran remain at odds over whether the reopening of the Strait of Hormuz is a precondition for a peace agreement or a final outcome. Previous reports indicated that the US had received a new Iranian negotiation proposal relayed through Pakistan. However, sources noted that US President Trump discussed the Iranian proposal with his national security team, and "Trump did not like the proposal." A US official stated that Trump was dissatisfied with Iran's proposal because it did not address Iran's nuclear program. A Pakistani mediation source said efforts to bridge the US-Iran divide have never ceased, but hopes for reviving peace efforts are fading.
Meanwhile, a US official stated that Trump has directed aides to prepare for a prolonged blockade against Iran. This move aims to target the Iranian regime's sources of funding, employing a high-risk strategy to force concessions on the nuclear issue, which Iran has long refused. The official said that in recent meetings, Trump decided to continue increasing pressure on Iran's economy and oil exports by preventing vessels from entering or leaving Iranian ports. He believes maintaining a blockade carries lower risks compared to resuming bombing campaigns or a direct withdrawal from the conflict. Iran, however, seeks the lifting of the maritime blockade as a precondition for further negotiations or the reopening of the Strait of Hormuz.
According to the latest reports, the US military is scheduled to brief President Trump on the latest plans for potential strikes against Iran on April 30th, Eastern Time. Reports indicate that the new plan prepared by US Central Command involves a "swift and powerful" strike against Iran, with targets likely including Iranian infrastructure. It is reported that US Central Command has applied for permission to deploy "Dark Eagle" hypersonic missiles to the Middle East. If approved, this would mark the first-ever combat deployment of US hypersonic missiles, potentially used to target ballistic missile launchers deep inside Iran.
Analysts point out that although the US and Iran have been in a temporary ceasefire since April 9th, the latest US actions suggest preparations for potential future military strikes. Both sides are currently using the ceasefire period to rearm, indicating that future conflicts could be more intense. If the situation escalates again, exacerbating the already severe disruption to global oil supplies, a renewed surge in oil prices would heighten the Eurozone's stagflation risks, potentially forcing policymakers into a difficult choice between curbing inflation and stabilizing growth.
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