The European Central Bank maintained its three key interest rates on Thursday as the war in the Middle East drags on, noting that the outlook for energy prices is well above the levels recorded before the conflict.
The deposit facility rate was kept at 2.25%, while the interest rates on the main refinancing operations and marginal lending facility were respectively maintained at 2.40% and 2.65%. The ECB Governing Council's decision was consistent with market expectations.
In its July meeting, the central bank cautioned that economic uncertainty remains high, with the full inflationary impact of the energy shock arising from the ongoing war still unknown.
"The Governing Council is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects," the ECB noted. It also reiterated its commitment to ensure that the inflation rate stabilizes at its 2% medium-term target.
Based on the latest data from Eurostat, the annual inflation rate in the euro area eased to 2.8% in June from 3.2% in May, with the core rate, which excludes energy, food, alcohol and tobacco, declining to 2.4% from the prior 2.6%.
"Through the rearview mirror, this decision clearly makes sense. Headline inflation has actually come down, there are very few signs of knock-on effects from higher energy prices, and the eurozone economy has shown some resilience to the current oil price shock," ING said in a note. "Looking ahead, however, the decision of whether to keep interest rates unchanged is not so straightforward."
"Unless oil prices start dropping significantly over the next weeks, the ECB's own macro projections in September will call for another rate hike, loud and clear."
