The ECB leaves interest rates unchanged. European stock markets plummet amid tensions in the Gulf

The alarm over the Red Sea, following US President Trump’s announcement this evening of a massive attack on Iran, has sent all European stock markets tumbling, with the FTSE MIB losing 2.8 per cent. Fears of a new energy shock for the Eurozone have resurfaced on the day of the ECB meeting, which left interest rates unchanged whilst postponing the decision on a possible tightening of monetary policy until September. Whilst President Christine Lagarde was speaking at a press conference, the echoes of the new crisis in the Middle East – already foreshadowed by the US attacks on Iran earlier that morning – were clearly felt. Lagarde explained that three members of the Governing Council had wondered whether it might not have been appropriate to raise interest rates as early as Thursday’s meeting. Consequently, the decision to keep rates unchanged appears to be a temporary one, so much so that analysts immediately began forecasting two rate rises by the end of the year. But this was not – or at least not solely – what triggered the sell-off on the stock markets.

The shock was mainly due to the sudden escalation of tensions between the United States and Iran, which pushed oil prices towards the $100 per barrel mark – a level not seen since the peaks of the war. The fear is that, in addition to the Strait of Hormuz, shipping through the Red Sea may also be disrupted following the Houthi attack on a Saudi oil tanker. Lagarde thus found herself having to be even more forceful than expected in outlining the risks of a deterioration in the eurozone’s economic outlook. The ECB President pointed out that the impacts on the price of Brent crude – “which is changing by the hour” – had not yet been factored into yesterday’s forecasts, and made it clear that Frankfurt cannot ignore a prolonged energy shock and the repercussions of similar incidents. She also asked ECB staff to carry out an “in-depth” analysis of oil and gas prices ahead of the September meeting. A cocktail of bad news that has shifted investor sentiment.