The European Central Bank on Thursday left interest rates unchanged, pausing after its first increase in three years in June. This decision comes against a backdrop of slowing inflation, which provided the regulator with some leeway, while renewed tensions in the Middle East have led to another rise in energy prices, maintaining the possibility of an additional rate hike this fall.
The ECB Governing Council kept the deposit rate at 2.25%, the main refinancing rate at 2.4%, and the marginal lending rate at 2.65%. These three key interest rates guide the monetary policy of the eurozone, with the deposit rate serving as the primary benchmark.
The ECB’s decision followed last week’s confirmation that inflation in the eurozone slowed to 2.8% in June, down from 3.2% in May, marking the first decline this year. Core inflation also eased to 2.4%. The pause came just six weeks after the ECB raised rates for the first time in nearly three years in response to the energy shock caused by the war in the Middle East, which had pushed inflation to its highest level since September 2023.
ECB President Christine Lagarde stated at the central bank forum in Sintra that the June increase was not an “insurance hike”, but rather a response to a genuine inflationary threat. Forecasts suggest a return to the target level of 2% is not expected until the end of 2027, and only if monetary policy is further tightened. Lagarde declined to commit to any future actions, noting that “previous guidelines on further policy are not currently being considered”.
Expectations Regarding the Energy Shock
The European Central Bank is evaluating the impact of the prolonged energy shock resulting from the conflict in the Middle East on inflation in the eurozone. In its statement, the central bank noted: “The forecast for energy prices, although very volatile, is currently close to the baseline scenario of the June forecasts from the Eurosystem staff and significantly exceeds the levels recorded before the conflict in the Middle East.”
The Governing Council is closely monitoring the intensity and duration of the shock, as well as its indirect and secondary effects, since the full inflationary impact of the energy shock has yet to be realized. July is not a month for updating forecasts, and economists at ING believe the bank will likely wait for new forecasts in September, when, in their view, a second rate hike will become more likely.
Renewed Tensions and Oil Prices
The complication is that the shock that prompted the June rate hike has resurfaced. Oil prices approached $120 per barrel in March before falling to about $72 following a temporary peace agreement at the end of June. However, the ceasefire this month has effectively collapsed.
The U.S. and Iran are exchanging new strikes, there have been attacks on tankers, and renewed sanctions have pushed the price of Brent crude above $90 per barrel. A prolonged increase in energy prices will lead to higher household bills and overall inflation in the second half of the year — it is these secondary effects that central bankers are most concerned about now.
Source: Euronews
