Euro, Bunds Slide After ECB Warns Of Stagflation

The European Central Bank kept interest rates unchanged, warning that the war in Iran could shift its expectations for inflation and the economy.

The deposit rate was left at 2% on Thursday - as predicted by all analysts in a Bloomberg survey.

Officials said that leaves them well positioned, reiterating in a statement that they’ll act one meeting at a time.

“The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth.

It will have a material impact on near-term inflation through higher energy prices. 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 Governing Council is well positioned to navigate this uncertainty.”

With oil and gas markets getting another jolt earlier in the day, it said once again that it’s “determined to ensure that inflation stabilizes at the 2% target in the medium term.”

2Y Bund yields are up strongly overnight (spiking on the BoE's surprisingly hawkish tone). Post-ECB, yields are flat (down then up) as traders expected a little more hawkishness...

The EUR is sliding modestly post-ECB...

Perhaps most notably, the new quarterly ECB outlook, based on inputs that ran until March 11 to account for the start of the war, pointed to faster inflation and slower growth...

Separate scenario analysis suggests that “a prolonged disruption in the supply of oil and gas would result in inflation being above, and growth being below, the baseline projections,” the ECB said.

How badly Europe is affected by the the fighting hinges on its duration - still the biggest unknown.

The European Union has warned inflation could surpass 3% in 2026 if Brent oil remains near $100 a barrel and gas prices stay elevated for a prolonged period.

Some economists see it even rising above 4% if problems persist.