The European Central Bank kept interest rates unchanged on Thursday, awaiting further economic data to determine if rising price pressures from the Iran conflict require additional monetary tightening. The ECB held its deposit facility rate at 2.25%, in line with market expectations.
Economists and investors anticipate that following June's rate hike, the ECB could raise rates by 25 basis points again in September. The ECB reiterated that it will not pre-commit to a specific policy path but will instead make decisions meeting by meeting based on the latest economic data.
The ECB stated in its Thursday announcement, "Uncertainty remains very high, and the inflation impact from the energy shock has not yet fully materialized. Therefore, the Governing Council is closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects." Policymakers reaffirmed that the ECB has sufficient policy tools to address the current complex situation.
Following the rate decision, eurozone bond prices moved little, with the 10-year German Bund yield rising 2 basis points to 3.19%. Earlier, as surging oil and gas prices amplified inflation concerns, the yield touched 3.21%, its highest level since 2011. Market expectations for future rate moves also remained stable. Swaps pricing suggests a 25-basis-point rate hike by the ECB in September is almost a certainty, with the probability of another rate increase before year-end also near 100%.
The euro held its earlier losses against the US dollar, last trading down 0.2% at $1.1392. In June, the ECB raised its benchmark rate by 25 basis points, its first rate increase in nearly three years. This move also made it the first major central bank among the G7 to raise rates since the outbreak of the Iran war. The June hike sparked debate about whether the ECB was repeating the mistakes of 2008 and 2011, when premature monetary tightening interrupted economic recoveries.
The ECB warned in June that inflation stemming from the Iran war has spread beyond the energy sector, although the overall economy remains resilient. Now, policymakers are weighing the need for further tightening. In early July, some ECB officials believed that US-Iran peace negotiations could limit the conflict's impact on eurozone consumer prices. However, with tensions escalating again in the Strait of Hormuz, global oil prices are once again approaching $100 per barrel, reigniting inflation concerns.
ECB President Christine Lagarde held a press conference following Thursday's policy meeting. She stated that energy inflation could keep prices significantly above target well into the first half of 2027, with the conflict being the primary source of uncertainty. Lagarde again reiterated that the bank would provide no forward guidance. The market widely believes that if further rate increases are deemed necessary, the September meeting will be the appropriate window to implement such a move, as more inflation data and business surveys will be available to inform policy adjustments.
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