ECB holds rates steady as Iran conflict fuels energy inflation concerns
President Christine Lagarde warns of second-round effects as broader Eurozone inflation eases to 2.8 per cent in June.
The European Central Bank has maintained its base interest rates unchanged, signalling a cautious stance as it navigates the economic fallout from the ongoing conflict involving Iran. The Frankfurt-based institution announced on Thursday that it would keep its key rates steady for the time being, emphasising that it is closely monitoring the intensity and duration of the energy price shock resulting from the war in the Middle East.
While oil futures briefly surpassed US$100 per barrel and exchanges of fire between the United States and Iran have intensified, recent economic indicators reduced the immediate urgency for further monetary tightening. The central bank noted that the outlook for energy prices remained aligned with its June projections, although these levels sit significantly above pre-conflict figures. The ECB stated that uncertainty remains high and that the full inflationary impact of the energy shock has yet to fully materialise.
ECB President Christine Lagarde acknowledged during a press conference that some governors had considered raising rates during the current meeting. However, she highlighted positive developments in employment figures, industrial activity, and plans to increase European defence spending. Lagarde also pointed out that while energy inflation remains a primary concern, broader inflationary pressures are largely rooted in energy costs rather than essential goods such as food.
Eurozone inflation dipped to 2.8 per cent in June, down from 3.2 per cent in May, though energy inflation remains elevated at 8.5 per cent compared to 10.8 per cent the previous month. Lagarde warned that prolonged high energy prices could drive up broader inflation through indirect and second-round effects, potentially impacting wages and other prices more strongly than currently expected.
The bank’s deposit facility rate remains at 2.25 per cent, with the main refinancing operations rate at 2.40 per cent and the marginal lending facility rate at 2.65 per cent. These figures are lower than the 4.5 per cent peak reached in 2023 during the inflationary spiral following the pandemic and Russia’s invasion of Ukraine. The ECB affirmed its commitment to its medium-term inflation target of stabilising prices at or around 2 per cent, adopting a data-dependent and meeting-by-meeting approach to future policy decisions.
