European Central Bank holds rates unchanged as energy shock from Iran war causes massive uncertainty

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FRANKFURT, Germany (AP) — The European Central Bank left its key interest rates unchanged Thursday and warned that the Iran war would boost inflation in the short term through higher energy prices - but that the long-term impact on consumer prices and the economy was uncertain.

The bank's rate-setting committee left its benchmark deposit rate unchanged at 2%, where it has been since June 2025.

The bank said that the war “has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth.” The post-decision statement said long-term inflation expectations remained “well anchored” and that the bank would decide whether to change interest rates based on incoming data at future meetings.

The Iran war puts the world's central banks in a bind: higher energy prices will likely boost inflation in the short term, but in the long term a drawn-out energy crisis could hurt growth. Central banks typically raise rates to fight inflation and lower them to stimulate growth.

The ECB move follows a decision earlier on Thursday by the Bank of England to hold its main interest rate at 3.75% as the sharp oil and gas price hikes following the start of the Iran war have stoked renewed concerns about inflation.

And that follows a move on Wednesday by the U.S. Federal Reserve to keep its key interest rate unchanged.

Chair Jerome Powell highlighted the increasingly uncertain outlook for the U.S. economy and inflation in the wake of the Iran war, suggesting the Fed could stand pat for an extended period.

Inflation in Europe has subsided from a double-digit peak to 1.9% in February, in line with the bank's target of 2%.