As expected, The ECB takes a break and leaves rates unchanged waiting to understand what the impact of the new escalation will be in Middle East and the resulting surge in oil prices, which, just as ECB President Christine Lagarde was holding her customary post-meeting press conference, returned to above $100 a barrel.
The deposit rate therefore remains at 2,25%, the rate on main refinancing at 2,40%, and the rate on marginal lending at 2,65%. The halt comes after the increases established last month and after the confirmation, last week, that Eurozone inflation fell in June to 2,8% from 3,2% in May, the first decline since the beginning of the year, while core price growth slowed to 2,4%.
Today's decision "it was unanimous, but I would like to point out that some members of the Council wondered whether it was not the case to consider a rate increase of interest. We had a really thorough analysis and unanimously decided that we were in the ideal position to wait and remain very attentive, in the coming weeks, to how the situation evolves and to the data we receive,” explained the head of the European Central Bank.
"In next meeting in September, we will receive two monthly indicators on inflation, the second quarter GDP, two indices on consumer expectations, an index on employee compensation and two PMI indices - he explained, also revealing that he had asked the ECB staff for an in-depth analysis "on the different oil prices, but also on gas". "It seems like an endless list, but it only serves to give you an idea of the volume of data we will have and the scope of the information we want to acquire to apply the reaction function. So, we'll receive all this data and analyze it very carefully." the next hike could come as early as September, as also anticipated by several analysts.
ECB: "Uncertainty is high, inflationary impact is yet to come."
"The risks to the inflation outlook are tilted to the upside," Lagarde said, explaining that the dangers posed by the war in the Middle East are compounded by "the worsening climate and environmental crises," which "could push food prices higher than expected." "Conversely, inflation could be lower if the Middle East conflict is resolved in a lasting manner or if the indirect or second-round effects prove less pronounced than expected," she added.
In this context, "the outlook for energy prices, although highly volatile, is currently close to the baseline projections formulated in June by Eurosystem staff and well above those recorded before the conflict in the Middle East," the Eurotower wrote in the statement issued after the meeting. For the board, at the moment, “uncertainty remains high e the inflationary impact of the energy shock has yet to fully manifest itself.”
“We will lend particular attention to any risk of a knock-on effect Lagarde emphasized at the press conference. "It's clear that there are direct effects, and it goes without saying that there are also indirect effects, if you consider the price of transportation, for example. But we're not seeing them at the moment. So, believe me, we're really looking carefully at the emergence of second-order effects, but we're not seeing them."
Answering journalists' questions, the ECB official said that "we are returned to the risk assessment we conducted in June“At our conference in Sintra, he had referred to a more balanced environment, that is, more balance between upside risk and downside risk for inflation and risk,” he explained. “And obviously this reflected the confidence we had for a couple of weeks, but then the conflict reignited with its impact on commodity prices and, consequently, the expectations we have regarding prices.”
Then, regarding today's inflation, the French economist said she was satisfied with the drop in June, but stated that the energy shock continues to impact prices and that companies plan to increase selling prices: “it is becoming more expensive for companies to obtain production factors and therefore they plan to increase selling prices”.
Lagarde: "The Council remains in a favorable position."
First in the board's note and then during Lagarde's press conference it was reiterated that "with today's decision the Board of Directors remains in a favorable position to address the uncertainty caused by the conflict in the Middle East and confirms that, as per tradition, to define the appropriate monetary policy orientation, it will follow a data-driven approach, according to which decisions are made on a case-by-case basis at each meeting. "In particular, the Governing Council's interest rate decisions will be based on its assessment of the inflation outlook and associated risks, taking into account incoming economic and financial data, as well as underlying inflation dynamics and the strength of monetary policy transmission, without being committed to a particular rate path," the central bank further specifies.
“The Governing Council stands ready to adjust all its instruments within its mandate to ensure that inflation stabilizes at its medium-term aim of 2% and to preserve the smooth functioning of the monetary policy transmission mechanism.” Then the warning: “The backstop for the monetary policy transmission mechanism can be used to counteract unjustified, disorderly market dynamics that they put seriously the transmission of monetary policy is at risk across all euro area countries, thus enabling the Governing Council to fulfil its price stability mandate more effectively.”
Lagarde: "Growth will remain modest in the short term"
“The forward-looking indicators suggest that economic growth will remain modest in the short term", held back by the energy shock and related uncertainties. However, the fundamental drivers of medium-term growth remain intact," Lagarde explained at the press conference in Frankfurt. "Private consumption, investments in new digital technologies, public spending on defense and infrastructure, and some recovery in exports should all contribute to the overall growth momentum," she added, adding that "Looking at economic activity, recent inflation data point to some improvement in activity in the second quarter, even if the conflict in the Middle East continued to act as a brake,” said the head of the Eurotower, referring to the activity of the services sector “which has partially recovered”, to digital services, “solid” partly thanks to AI and to the manufacturing sector “which has continued to hold up”.
Lagarde: "I won't leave before 2027."
Regarding the possible early farewell at the ECB, announced last month in an interview with Las Echos, Lagarde said:“You won’t see me go until 2027. When there are clouds on the horizon, the captain stays on the ship.”
