LONDON, March 19 (Reuters) – The European Central Bank kept its key interest rate at 2% on Thursday and warned that the war in Iran was clouding the outlook for growth and inflation in the euro zone.
Short-dated government bond yields, the most sensitive to rate expectations, remained sharply higher on the day with Italian yields up almost 12 basis points
The euro was a third of a percent firmer at $1.1478, while European shares were down almost 3% as world markets came under renewed selling pressure on worries about the Middle East conflict.
COMMENTS:
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:
“The ECB leaves rates on hold, with the Governing Council “not pre-committing to a particular rate path.” However, core inflation is now forecast to average 2.1% in 2028 (versus 2.0% in December). So, despite a weaker GDP growth profile, inflation is expected to remain above target for an extended period of time, which suggests that some on the Governing Council may start discussing the need for tighter policy.”
RICHARD CARTER, HEAD OF FIXED INTEREST RESEARCH, QUILTER CHEVIOT, LONDON:
“Given the headroom available, you could conceivably see the ECB make a move to raise interest rates once or twice this year to pre-empt any inflationary spike as a result of a sustained rise in energy prices.”
“What may be difficult is finding what is the most appropriate level of action given the sluggish economic growth still being experienced in Europe. Any inflation spike will naturally act as a brake on economic growth, so it is important the ECB does not overtighten and keeps focus on the economic outlook. This is of course very difficult with such a moving picture in the Middle East and thus the outlook for interest rates is very much up in the air from here.”
MADISON FALLER, GLOBAL INVESTMENT STRATEGIST, J.P. MORGAN PRIVATE BANK, LONDON:
“Europe has more at stake in this energy shock, and the ECB knows it. That backdrop forced a meaningful shift in tone today. Inflation forecasts have been revised higher, growth forecasts trimmed, and a hiking bias is now being telegraphed. The ECB is not committing to a hike, but it is not pushing back on the aggressive flip in market expectations or ruling one out either.”
(Reporting by the Reuters Markets Team; Compiled by Dhara Ranasinghe, Editing by Amanda Cooper)
