Energy uncertainty still threatens inflation outlook, says ECB

The European Central Bank (ECB) kept its three key interest rates unchanged on Thursday, saying it remains closely monitoring the impact of the Middle East conflict on energy prices and inflation across the euro area.

The ECB’s Governing Council said the current outlook for energy prices remains highly volatile but is broadly in line with the baseline scenario included in the June Eurosystem staff projections.

However, it warned that energy prices remain well above levels recorded before the outbreak of the conflict in the Middle East, with uncertainty continuing to weigh on the economic outlook.

The central bank said the full inflationary impact of the energy shock has not yet been fully realised.

The Governing Council said it is monitoring the intensity and duration of the shock, along with possible indirect effects and second-round impacts on prices and wages.

The ECB reiterated its commitment to ensuring that inflation stabilises at its 2 per cent medium-term target.

The decision leaves the euro area’s main policy rates unchanged, with the deposit facility rate remaining 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 said maintaining current rates leaves policymakers in a strong position to respond to uncertainty linked to the geopolitical situation.

It added that future decisions will continue to follow a data-dependent and meeting-by-meeting approach, rather than following a predetermined path.

The Governing Council said interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, taking into account incoming economic and financial data.

It will also consider developments in underlying inflation and the effectiveness of monetary policy transmission.

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

The central bank’s decision comes as policymakers assess the potential consequences of renewed energy market volatility following geopolitical tensions in the Middle East.

The ECB said it will continue evaluating whether the energy shock creates broader inflationary pressures beyond direct energy costs.

The central bank also confirmed that its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) portfolios continue declining at a measured and predictable pace.

The reduction is taking place because the Eurosystem is no longer reinvesting principal payments from maturing securities.

The ECB said it remains prepared to use all available policy tools within its mandate if needed to ensure inflation returns to target and monetary policy transmission continues to function smoothly.

“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,” the ECB said.

It added that the Transmission Protection Instrument remains available to address unwarranted and disorderly market movements that could threaten the transmission of monetary policy across euro area countries.

The ECB said the tool allows the Governing Council to more effectively fulfil its responsibility of maintaining price stability.