ECB keeps rates on hold as Iran war clouds economic outlook

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.

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Oil and gas prices have jumped since the US-Israeli attacks on Iran began, raising the risk that higher energy costs will drive up consumer prices and depress activity across the 21-nation currency bloc, which relies heavily on imported fuel.

"The war in the Middle East...will have a material impact on near-term inflation through higher energy pricesm," the ECB said. "Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy."

The euro zone's central bank kept its options open, however, saying it was monitoring the war and its impact on inflation, both including and excluding energy prices, and growth.

"The Governing Council is well positioned to navigate this uncertainty," the ECB said. "Inflation has been at around the 2% target, longer-term inflation expectations are well anchored, and the economy has shown resilience over recent quarters."

Central banks in the United States, Canada, Japan, Britain, Sweden and Switzerland delivered broadly similar messages earlier in the day or on Wednesday.

Financial markets now expect euro zone inflation to climb close to 4% over the next year, then take years to return to the ECB’s 2% target.