ECB Keeps Interest Rates Unchanged and Warns of Energy Shock Risks

The European Central Bank left interest rates unchanged following its policy meeting, noting that the full impact of the energy shock on inflation remains unquantified and pointing to ongoing economic uncertainty.

Interest Rates Maintained

The Governing Council of the European Central Bank decided to leave interest rates at their current levels, according to Thursday’s post-meeting statement. The ECB noted that the full effects of the energy shock on inflation are not yet visible.

This decision matched expectations from analysts surveyed by Bloomberg. At its previous meeting, the ECB had raised interest rates for the first time since 2023.

Current Rate Levels

During the previous six meetings, the ECB had left interest rates unchanged. In the earlier monetary policy easing cycle, the deposit facility rate was lowered by 175 basis points.

Interest rates on the central bank deposit facility, main refinancing operations, and marginal lending facility remain unchanged at 2.25 percent, 2.40 percent, and 2.65 percent respectively, the post-meeting statement confirmed.

Uncertainty and Energy Shock

The statement indicated that the ECB remains well-positioned to respond to growing uncertainty. Energy price prospects, while highly volatile, are currently close to the baseline of the Eurosystem staff’s June projections and significantly higher than pre-Middle East conflict levels.

Uncertainty remains high, and the full impact of the energy shock on inflation has not yet materialized. The Governing Council is therefore closely monitoring the intensity and duration of the shock, along with its indirect and secondary effects, remaining determined to steer monetary policy to ensure inflation stabilizes at the 2-percent target over the medium term.

Data-Dependent Approach

Thursday’s decision positions the ECB well to deal with conflict-induced uncertainty. The Council will apply a data-dependent approach, assessing the situation meeting by meeting to determine the appropriate monetary policy stance.

Specifically, Governing Council rate decisions will rely on inflation outlook assessments and associated risks in light of incoming economic and financial data, core inflation dynamics, and the strength of monetary transmission. The ECB does not pre-commit to a specific rate path.

Asset Purchase Programs

The ECB once again confirmed the end of reinvestments under the PEPP and APP programs. APP and PEPP portfolios are declining at a measured and predictable pace because the Eurosystem no longer reinvests principal repayments from maturing securities.

The Governing Council remains ready to adjust all instruments within its mandate to return inflation to its 2 percent target over the medium term and preserve smooth monetary policy transmission. Additionally, the transmission protection instrument is available to counteract unwarranted, disorderly market dynamics that pose a serious threat to monetary transmission across all euro area countries.

Market Reaction and Next Meeting

Following the announcement, the euro fell 0.16 percent against the dollar to 1.1394, while the yield on 10-year German bunds rose 2 basis points to 3.2 percent.

The next ECB meeting is scheduled for September 9-10.