The European Central Bank (ECB) kept its three key interest rates unchanged on Thursday, indicating a cautious approach as it monitors the impact of the Middle East conflict on energy prices and inflation in the euro area.
The ECB’s Governing Council acknowledged the current volatility in energy prices, noting that it aligns broadly with the baseline scenario outlined in the June Eurosystem staff projections. However, the Council also highlighted that energy prices remain significantly higher than pre-conflict levels, which continues to create uncertainty in the economic outlook.
In its statement, the ECB warned that the full inflationary effects of the energy shock have yet to be realised. The Council is closely observing the intensity and duration of this shock, including potential indirect and second-round effects on prices and wages.
The central bank reiterated its commitment to stabilising inflation at its medium-term target of 2 per cent. By maintaining the current rates, the ECB aims to remain well-positioned to respond to the uncertainties stemming from the geopolitical situation.
The euro area’s main policy rates remain unchanged: the deposit facility rate is at 2.25 per cent, the main refinancing operations rate at 2.40 per cent, and the marginal lending facility rate at 2.65 per cent. The ECB indicated that future decisions will adhere to a data-driven approach, assessing the inflation outlook and associated risks based on the latest economic and financial information.
The Governing Council emphasised that it is not committing to a specific rate path but will adjust its policies as required. This decision comes as the ECB evaluates the broader implications of renewed energy market volatility due to the ongoing geopolitical tensions.
Furthermore, the ECB confirmed that its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) portfolios will continue to decline at a predictable pace, with no reinvestment of principal payments from maturing securities.
The central bank remains ready to utilise all available policy tools within its mandate to ensure that inflation returns to target and that monetary policy transmission operates smoothly. The ECB stated, “The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2 per cent target in the medium term.”
Additionally, the Transmission Protection Instrument is available to manage any unwarranted market movements that could disrupt the transmission of monetary policy across euro area countries, enhancing the ECB’s ability to maintain price stability.
