Financial News: ECB Leaves Rates Unchanged Amid High Uncertainty, Septembe

ECB Leaves Rates Unchanged Amid High Uncertainty, September Hike Likely

(RTTNews) - The European Central Bank left its key interest rates unchanged on Thursday as expected, after raising them for the first time in nearly three years in the previous session, but policymakers acknowledged that the situation remains highly uncertain as the full impact of the energy shock caused by the Middle East conflict is yet to be felt. Meanwhile, remarks from the ECB chief heavily sided towards an interest rate hike in the upcoming session in September.

The Governing Council, led by ECB President Christine Lagarde, held the deposit rate steady at 2.25 percent, the refinancing rate at 2.40 percent and the marginal lending rate at 2.65 percent.

<a href=https://www.rttnews.com/3659637/european-central-bank-hikes-interest-rates-for-first-time-since-2023.aspx target=_blank >In June, the central bank for the single currency bloc raised interest rates by 25 basis points</a>, which was the first hike since September 2023, and became the first among its peers to lift interest rates in the face of rising inflationary pressures caused by the war in Iran.

The ECB observed that energy prices are well above the levels seen prior to the Iran war, and their outlook is highly volatile and currently stands close to the baseline of the June ECB staff projections.

"Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out," the ECB said. "The Governing Council is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects."

Speaking at the post-decision press conference, Lagarde said there were no signs of second-round effects of the high inflation yet but did not rule out they will surface in the medium term. However, she was confident of the longer-term outlook and pointed out that inflation expectations for the longer horizon remains well anchored.

<a href=https://www.rttnews.com/3667987/eurozone-inflation-slows-as-estimated.aspx target=_blank >Euro area inflation sharply slowed</a> to a three-month low of 2.8 percent in June and the core figure eased to 2.4 percent.

The ECB chief also suggested that some policymakers explored the possibility of an interest rate hike this month but added that the final decision to maintain status quo was unanimous.

Risks to the macroeconomic outlook were no longer balanced, Lagarde's comments suggested which economists saw as a hawkish shift. The risks to the growth outlook were on the downside, while those to future inflation were on the upside, she said.

Lagarde's comments signaled that "there was not a sufficient majority today in favor of hiking rates, but unless there are really no additional inflationary signs over the next two months, a September rate hike is almost a done deal", ING economist Carsten Brzeski said.

"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," Brzeski said. "Consequently, we are back in a situation in which the question is what could stop the ECB from hiking in September, rather than what would move the ECB to hike."

Policymakers are committed to setting monetary policy to ensure that inflation stabilizes at its 2 percent target in the medium term, the bank asserted.

"With today's decision, the Governing Council remains well positioned to navigate the uncertainty caused by the conflict," the ECB affirmed. "It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance."

Future decisions will be based on the assessment of the inflation outlook and the risks surrounding it, incoming data and the developments in underlying inflation and the effectiveness of previous policy moves, the bank said.

The Governing Council is not pre-committing to a particular rate path, the ECB reiterated.

Lagarde was also quizzed about rumors that she will leave the ECB to participate in the French election next year. While she did not rule out the possibility of running in the French election, she asserted that she would stay at the helm of the ECB at least until 2027.

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