The European Central Bank left its policy rate unchanged, pausing after last month’s hike as it weighs an energy-price shock from the Middle East conflict. President Christine Lagarde said euro-area activity is showing some improvement, while the ECB warned that the shock’s full inflationary impact has yet to play out.
The European Central Bank held its deposit rate at 2.25% on Thursday, keeping policy steady as widely anticipated while it monitors an energy-price shock from the war in the Middle East. President Christine Lagarde said recent data points to some improvement in economic activity.
Against the dollar, the euro traded at 1.1379 as the press conference opened.
Energy shock keeps the ECB on guard
The bank said the outlook for energy prices is “highly volatile”, near its June staff-projection baseline and well above pre-conflict levels. That disruption traces to the Middle East, where Brent crude rose above $98 a barrel on Thursday amid fresh threats to tanker traffic.
Last month, the ECB delivered a rate hike, lifting the deposit rate by 25 basis points and becoming the first major central bank to raise rates in response to the Iran war.
Lagarde points to a modest recovery
Lagarde said activity and services have partly recovered, with digital services robust partly on the back of AI. Even so, firms and households expect the labour market to stay weaker than before the conflict, and indicators suggest activity remains modest.
Inflation still runs above target
Consumer prices in the euro area are running nearly 3% on an annualized basis, keeping inflation well above the ECB’s 2% target. That gap has stirred concern that workers will demand higher wages, feeding a stubborn price spiral.
The bank now sees headline inflation averaging 3% this year, 2.3% in 2027 and 2% in 2028, up from earlier forecasts of 2.6%, 2% and 2.1%. It also cut its growth forecast to 0.8% for this year, from 0.9% previously.
Policymakers said they are closely monitoring the shock’s intensity and duration, along with its second-round effects.
Sources: investingLive (snippet-based), Investing.com
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