FRANKFURT, July 24 (Xinhua) -- The European Central Bank (ECB) on Thursday decided to put interest rates on hold as oil prices surged due to the escalation of the Iran conflict.
The flaring up of the conflict has already sent crude oil prices soaring, raising inflation risks in the euro area. As speculation mounted over a possible ECB rate hike in September, the central bank insisted on a meeting-by-meeting approach to leave all possibilities open.
UNANIMOUS DECISION
The ECB's decision to leave rates unchanged followed the central bank's first rate hike since September 2023.
The ECB raised interest rates by 25 basis points in June, bringing the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility to 2.25 percent, 2.4 percent and 2.65 percent, respectively.
The rate hike decision was supported by the ECB staff's baseline projections in June, which indicated that headline inflation would peak at 3.4 percent in the third and fourth quarters of 2026 and remain above 3 percent until early 2027.
Elaborating on the rate-setting meeting held over the previous two days, ECB President Christine Lagarde disclosed at a press conference following the meeting that Governing Council members had reviewed all available data and assessed the situation before unanimously deciding to leave interest rates unchanged.
There's a lot of "back to the baseline" in the situation at the moment, Lagarde noted.
"The outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the conflict in the Middle East," the ECB said in a statement.
"BENIGN DEVELOPMENTS"
Despite volatile energy prices, heightened geopolitical tensions and increased uncertainty, the euro area witnessed some positive developments in inflation and economic conditions.
"Since our decision in June, we have had some relatively benign developments," Lagarde said at the press conference after the rate-setting meeting.
Euro area inflation declined to 2.8 percent in June from 3.2 percent in May, according to the statistical office of the European Commission.
Energy prices rose by 8.5 percent in June, compared with 10.8 percent in both May and April.
Euro area GDP grew by 0.3 percent year on year in the first quarter, which, according to Lagarde, was "a relatively good progression."
The decline in inflation in June and the lack of signs of second-round effects should have reduced the likelihood of an ECB rate hike, Carsten Brzeski, global head of macro for ING Research, said in a note published last week.
SEPTEMBER HIKE SPECULATION
As energy price increases can drive inflation sharply and abruptly higher, the latest surge in oil prices has fueled widespread speculation over a possible ECB rate hike in September.
Responding to a barrage of questions about a potential September rate hike, Lagarde stressed that the ECB would need to assess incoming data before making monetary policy decisions.
The ECB noted in a statement that uncertainty remains high and the full inflationary impact of the energy shock has yet to play out.
Lagarde disclosed that the central bank will "be particularly attentive to any risk of second-round effects."
The ECB appears convinced that it remains well-positioned to weather the latest headwinds. "With today's decision, the Governing Council remains well positioned to navigate the uncertainty caused by the conflict."
For analysts like Brzeski, the fresh round of oil price increases warrants another ECB rate hike.
"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. ■
