European Central Bank holds interest rates steady as Russia-Ukraine conflict fuels stagflation fears

LONDON — The European Central Bank on Thursday opted to keep interest rates steady, remaining cautious as it assesses the economic fallout from Russia's invasion of Ukraine.

The central bank's benchmark refinancing rate remains at 0%, the rate on its marginal lending facility sits at 0.25% and the rate on its deposit facility was kept at -0.5%.

No major policy decision from the central bank's governing council was expected, but market participants will be closely monitoring ECB President Christine Lagarde's press conference at 1:30 p.m. London time for hints about Europe's growth prospects given the escalating crisis.

The euro was trading around $1.1103 shortly after the decision, up 0.25% for the session. The common currency rose 1.6% on Wednesday to register its steepest daily jump in almost six years.

The ECB described Russia's conflict with Ukraine as "a watershed for Europe," while the Governing Council reaffirmed its pledge to "take whatever action is needed" to pursue price stability and to safeguard financial stability.

The central bank also announced it will wind down asset purchases faster than planned, before adding that it stands ready to revisit this decision if the outlook changes.

"If the incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases, the Governing Council will conclude net purchases under the APP in the third quarter," the bank said, referring to its asset purchase program.

It said monthly net purchases under the APP would amount to 40 billion euros ($44.5 billion) in April, 30 billion euros in May and 20 billion euros in June.

The ECB's meeting in Frankfurt, Germany comes exactly two weeks after Russian President Vladimir Putin launched a full-scale invasion of Ukraine. The conflict has rattled the global economy and sent shockwaves through financial markets, with Western allies imposing a barrage of sanctions against Russia.

Energy and commodity prices have soared as the Kremlin steps up its onslaught on Ukraine, prompting concern among economists that the euro zone economy could face a stagflationary shock. This refers to the toxic cocktail of sluggish economic growth and high inflation.

"The ECB has much to contemplate. Up until now it has been the most sanguine of the central banks when it comes to tightening policy, and with good reason, but it is all change," Neil Birrell, chief investment officer at Premier Miton Investors, said in a note.

"Inflation will be rampant, driven by energy and food prices soaring, turbo charged by the conflict in Ukraine. It can't be left to run out of control, but, equally, the ECB will be worried about acting in a way that makes growth roll over, with stagflation being the outcome," he added.

Consumer prices in the 19 countries that use the euro currency have climbed to record highs for four consecutive months, most recently hitting 5.8% in February. The ECB is targeting 2% inflation over the medium term.

It is also feared the Ukraine conflict could cause further problems for supply chains already disrupted by the coronavirus pandemic, negatively impacting economic growth alongside soaring oil and gas prices.

A Reuters poll in early March found the majority of economists expect the ECB to wait until the final few months of the year to raise interest rates. However, there is currently no consensus on the month that the central bank could bring an end to its asset purchase programme.