The European Central Bank has kept interest rates unchanged for the sixth consecutive time and has emphasized that the significant increase in tensions in the Middle East has added uncertainty.

The European Central Bank (ECB), while trying to assess the impact of the Middle East conflict on inflation and the economy, held its deposit facility rate at 2% unchanged for the sixth consecutive meeting on Thursday, in line with market expectations. Policymakers once again did not provide guidance on the future policy path, reiterating that decisions will be made at each meeting based on the latest data. However, the ECB adopted a tougher stance on the risks facing the eurozone. The ECB stated in its declaration that "the Middle East conflict has made the outlook more uncertain, bringing inflation upside risks and economic growth downside risks." "This conflict will have a substantial impact on short-term inflation through higher energy prices. The medium-term impact will depend on the intensity and duration of the conflict, as well as how energy prices pass through to consumer prices and the overall economy." The situation in the Middle East continues to deteriorate, with the conflict spreading to multiple energy infrastructure in the region. The latest shocks to the oil and gas market have led investors to bet that the ECB may have to raise borrowing costs this year. The severity of the impact on Europe from the conflict will depend on the duration of the war - which remains the biggest uncertainty. The EU has warned that if Brent crude oil prices remain around $100 per barrel and natural gas prices remain high for a long time, the inflation rate may exceed 3% in 2026. Some economists even believe that if this issue persists, the inflation rate may rise above 4%. In addition, the ECB's latest quarterly outlook shows accelerating inflation and slowing growth. The ECB stated that separate scenario analyses show, "If oil and gas supplies are interrupted long-term, inflation will be higher than the baseline forecast, while economic growth will be lower than the baseline forecast." However, analysts suggest that the value of this latest outlook may be limited, as many of the input data for the forecasts may have been before the outbreak of the Middle East conflict. Compared to when the Russia-Ukraine conflict broke out in 2022, the ECB policymakers currently have more leeway to act. However, some have already raised the possibility of a rate hike - even as economic output shows signs of weakness, sparking concerns about stagflation. ECB President Lagarde will outline her views at a press conference at 2:45 pm local time. While Lagarde and other ECB officials have emphasized that they will not allow a repeat of the last round of inflation shocks, most are also against hasty action. They point out that the current situation is different from four years ago, when pent-up post-pandemic demand boosted demand and borrowing costs were below zero. Investors currently expect the ECB to raise rates by more than two times this year, each time by 25 basis points. But economists are divided on this, generally expecting no changes until 2027.