No interest rate cut! The European Central Bank remains steady for the sixth time, with the Middle East conflict creating high uncertainty for the Eurozone outlook

The European Central Bank (ECB) maintained its interest rates at the latest policy meeting, but the wording has clearly become more hawkish, acknowledging that the conflict in the Middle East has significantly increased uncertainty regarding the eurozone's outlook.

On Thursday, the ECB announced that it would keep the deposit rate unchanged at 2%, marking the sixth consecutive time the bank has held rates steady during a policy meeting, in line with analysts' expectations:

• ECB deposit facility rate 2%, expected 2%, previous 2%.
• ECB marginal lending rate 2.4%, expected 2.4%, previous 2.4%.
• ECB main refinancing rate 2.15%, expected 2.15%, previous 2.15%.

Compared to previous statements, the ECB has clearly intensified its warnings about risks this time. The bank noted in its statement that the conflict in the Middle East has "significantly increased" the uncertainty surrounding the eurozone's economic outlook, posing upside risks to inflation and downward pressure on economic growth.

The latest quarterly economic outlook released by the ECB predicts that inflation will rise faster than previously expected, while economic growth will slow. Scenario analysis further indicates that if oil and gas supplies face sustained disruptions, inflation will exceed baseline forecasts, and growth will fall below baseline forecasts, both pointing to a more complex policy response. Traders have reduced bets on ECB rate hikes, expecting an increase of 61 basis points by the end of the year.

Middle East Conflict Becomes the Biggest Variable

In this statement, the ECB's expression of geopolitical risks is noticeably stronger than before. The statement directly identifies the war in the Middle East as a core variable affecting the eurozone's outlook, noting that the conflict will have a "substantial impact" on near-term inflation, primarily transmitted through rising energy prices.

The ECB also emphasized that the key to medium-term inflation trends lies in the scale of indirect and second-round effects, as well as the extent to which energy price shocks spread to consumption and the economy. Despite rising external risks, the ECB reiterated its commitment to ensuring that medium-term inflation remains stable at the 2% target level and stated that long-term inflation expectations are currently well anchored.

The quarterly economic outlook released by the ECB has incorporated faster inflation and slower growth into its baseline forecasts. Beyond the baseline scenario, the ECB has separately published scenario analysis results: if oil and gas supplies experience long-term disruptions, inflation will exceed baseline forecast levels, while economic growth will fall below baseline forecast levels.

In terms of monetary policy framework, the ECB clearly stated that it will guide decisions based on core inflation rates and the strength of the monetary policy transmission mechanism, without making any prior commitments regarding future interest rate paths