The European Central Bank kept its benchmark interest rate unchanged on Thursday and warned that the conflict in Iran is driving up energy prices, which in turn is pushing eurozone inflation higher while also dragging on economic activity.
The central bank, which serves the 21 eurozone member countries, maintained the deposit rate at 2%, in line with economists' expectations. Policymakers, including ECB President Christine Lagarde, had previously signaled such a move.
The ECB further heightened its risk warnings, noting that the Iran conflict and disruptions to fuel transport through the Strait of Hormuz would have subsequent impacts on the eurozone economy.
In a press release, the ECB stated: "While the latest overall information remains broadly consistent with the Governing Council’s previous assessment of the inflation outlook, both upside risks to inflation and downside risks to growth have intensified."
The statement added: "The longer the conflict persists and the longer energy prices remain elevated, the greater the impact on overall inflation and the real economy."
Currently, the eurozone inflation rate is already above the ECB's 2% policy target and is expected to rise further in the coming months, while economic growth is showing signs of weakness.
The ECB noted that long-term inflation expectations remain stable, but short-term inflation expectations have risen significantly.
Investors expect the ECB to raise the deposit rate three times over the next 12 months, ultimately reaching 2.75%.
In Thursday's decision, the ECB also kept its regular liquidity operation rates unchanged: the weekly tender lending rate at 2.15% and the daily overnight lending rate at 2.40%.
Markets will now focus on the press conference by ECB President Christine Lagarde scheduled for 12:45 GMT.
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