ECB holds rate but signals possible rise as Middle East fighting lifts price risks

The European Central Bank kept its key deposit rate unchanged at 2.25 percent on Thursday, but signalled that a rate rise in September was possible as renewed Middle East fighting threatened to push prices higher.

ECB President Christine Lagarde said the decision to hold rates was unanimous. She added, however, that some governors had asked whether the bank should consider a hike.

The ECB was already watching the effect of renewed conflict between Iran and the United States and rising oil prices before its rate-setting meeting. The report said two weeks of renewed fighting had slowed traffic through the Strait of Hormuz, a waterway that in peacetime carries about a fifth of the world's oil and natural gas.

Brent crude passed $100 a barrel while Lagarde was speaking, as markets reacted to Iran-aligned Houthi rebels claiming attacks on Saudi oil tankers in the Red Sea. US President Donald Trump later threatened the Houthis with major military punishment. Lagarde called the reports of Houthi attacks alarming, but said they came too late to be included in the ECB's decision on Thursday. She said the Red Sea situation was clearly affecting Brent prices.

Lagarde said the ECB had not yet seen clear evidence that higher energy prices were feeding into the wider economy. But she said inflation was now more likely to rise than at the bank's June meeting. She said the risks to the inflation outlook were on the upside and warned that a stronger energy shock could affect other prices and wages.

Europe depends heavily on imported oil and gas, making eurozone monetary policy exposed to fast-moving geopolitical events. The ECB raised rates in June by a quarter percentage point to 2.25 percent after the near total closure of the Strait of Hormuz.

A memorandum of understanding signed last month by Washington and Tehran had raised hopes of a durable solution to the conflict. But the resumption of fighting has raised fears that eurozone inflation, which eased to 2.8 percent in June, could pick up again. Lagarde said hopes for only a minor inflation impact now looked unlikely, while stressing that the war remained uncertain and could change quickly.