Despite a renewed spike in oil prices, the European Central Bank (ECB) decided on Thursday to keep its benchmark interest rate unchanged at 2.25%.
This decision was in line with widespread market expectations. It comes six weeks after the ECB raised rates by 25 basis points, becoming the first central bank among the G7 nations to tighten monetary policy in response to the sharp rise in energy prices triggered by the Middle East conflict.
In its statement, the ECB noted that "uncertainty remains elevated, and the full inflationary impact of the energy shock has not yet fully materialized."
Since the beginning of July, the collapse of the US-Iran ceasefire and continued severe restrictions on shipping through the Strait of Hormuz have driven international oil prices up by more than 30%.
On Thursday, international oil prices breached the $98 per barrel mark for the first time since early June, following claims by Iran-backed Houthi rebels of attacks on two Saudi oil tankers in the Red Sea, further disrupting crude supplies.
The ECB stated that the outlook for energy prices is "volatile," but is broadly consistent with the baseline forecast published by the bank last month. That forecast projects inflation peaking at 3.4% in the second half of this year and remaining around 3% into early 2027.
Inflation in the eurozone has persistently exceeded the ECB's 2% medium-term target since March. However, it edged down to 2.8% in June, as markets had hoped for a resolution to the US-Iran conflict, leading to a significant drop in oil prices at that time.
The ECB emphasized that it is "closely monitoring" the intensity and duration of the current energy shock, while also watching for potential knock-on effects from higher oil and gas prices spreading to other parts of the economy. The bank added that it is "well-equipped to deal with the various uncertainties arising from the conflict."
Carsten Junius, Chief Economist at Bank J. Safra Sarasin, believes the ECB's statement on Thursday "leaves ample room for another rate hike in September."
Traders are betting on further interest rate increases from the ECB. The swaps market has fully priced in two more 25-basis-point rate hikes by the first quarter of next year, with the next expected move occurring in September or October.
Francesco Pesole, a foreign exchange strategist at ING, said the ECB's mention that the inflationary effects of the energy shock have yet to be released is aimed at "guiding the market to maintain hawkish expectations."
Following the widely anticipated decision, the euro edged down 0.2% against the US dollar to $1.139, while the euro was broadly flat against the British pound.
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