The European Central Bank (ECB) kept its key interest rates unchanged on Thursday, leaving the deposit rate at 2.00%, in line with market expectations. The decision, announced on April 30, 2026, was accompanied by a stark warning that the ongoing war involving Iran is intensifying inflation risks and weighing on economic growth in the euro zone.
In its policy statement, the ECB highlighted that the disruption to fuel flows, particularly through the strategic Strait of Hormuz, has pushed energy prices higher. This adds fresh pressure on inflation, which is already above the central bank's 2% target. Policymakers, including ECB President Christine Lagarde, had previously signaled a pause in rate adjustments.
Inflation risks rise amid geopolitical tensions
The ECB sharpened its warning on the economic fallout from the conflict. "While the incoming information has been broadly consistent with the Governing Council's previous assessment of the inflation outlook, the upside risks to inflation and the downside risks to growth have intensified," the ECB said. It further added, "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 central bank noted that inflation expectations over shorter time horizons have risen sharply, even as longer-term expectations remain stable. The ultimate impact on inflation and growth will depend on how long energy prices stay elevated and the extent of indirect effects across the economy.
Policy stance remains data-dependent
The Governing Council reiterated its commitment to a flexible and data-driven approach. Decisions will be taken on a meeting-by-meeting basis, with no pre-commitment to any specific rate path. Despite holding rates steady, investors expect further tightening, with markets pricing in three rate increases over the next 12 months, potentially taking the deposit rate to 2.75%.
The ECB confirmed that all three key interest rates remain unchanged: the deposit facility at 2.00%, the main refinancing operations rate at 2.15%, and the marginal lending facility at 2.40%. The central bank's asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) portfolios continue to decline at a measured pace, as it no longer reinvests proceeds from maturing securities.
White House official warns of policy mistake
Adding to the narrative, White House National Economic Council (NEC) Chairman Kevin Hassett warned that raising interest rates would be a critical policy mistake for both the ECB and the Federal Reserve. Speaking from Washington, D.C., Hassett argued that further rate hikes could stall economic growth and cited long and variable lags in monetary policy. He pointed to recent economic data, including slowing GDP growth in both the U.S. and the Eurozone, as evidence that the risk of recession outweighs the risk of persistent inflation. The ECB's next meeting is scheduled for April 17, 2025, while the Fed meets in March 2025.
The ECB signaled it remains prepared to adjust its policy tools if necessary and highlighted the availability of the Transmission Protection Instrument to address disorderly market conditions. Investors are now focusing on Lagarde's upcoming press conference for further signals on the policy outlook and assessment of evolving economic risks.
