European Central Bank holds rates steady, warns outlook is 'significantly more uncertain'

The European Central Bank opted to keep interest rates on hold at its latest monetary policy meeting, saying the war in Iran has made the outlook “significantly more uncertain”.

Policymakers said the conflict had created “upside risks for inflation and downside risks for economic growth,” prompting traders to up bets on potential ECB rate hikes later this year.

The ECB said the ongoing conflict “will have a material impact on near-term inflation through higher energy prices”, while its medium-term implications would depend “both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy.”

Regional central banks, the Bank of England, Sweden's Riksbank and Swiss National Bank, also opted to keep rates on hold on Thursday, as the war continues to cloud the outlook for inflation and growth.

Before the war on Iran began in late February, Europe's central banks enjoyed a more benign inflation outlook as interest rates looked set to remain stable or keep falling across the region.

But the conflict has upset the economic equilibrium, threatening Europe's energy supplies, growth and the outlook for consumer prices. Expectations for interest rates across the continent have been upended.

The ECB was not expected to change stance on its benchmark interest rate (and indeed kept its deposit facility rate at 2% on Thursday) even before the war began, with euro zone inflation data remaining near the central bank's 2% target.

The latest flash data from Eurostat showed inflation in the euro zone rose to 1.9% in February, up from 1.7% in January.

But the central bank on Thursday revised medium-term inflation expectations upwards. Headline inflation is now expected to average 2.6% in 2026, 2% in 2027 and 2.1% in 2028 in the bank's baseline scenario.

It blamed a rise in energy prices for the revisions. In December, the ECB had said it expected headline inflation to be just shy of 2% in 2026 and 2027, before increasing to its target of 2% in 2028.

At the central bank's last meeting in February, ECB President Christine Lagarde had repeated a mantra that the euro zone's economic outlook was “in a good place” but warned against complacency. Her caution now appears to be well-founded. Addressing reporters at the post-announcement press conference, Lagarde rowed back on her previous “good place” comments.

“We are starting from a good base, so I'm not saying we are in a good place, [I'm saying] we are both well-positioned and well-equipped to deal with the development of a major shock that is unfolding,” she told CNBC's Annette Weisbach.