ECB Holds Interest Rates Steady, Monitors Iran War Economic Fallout

The European Central Bank (ECB) said on Thursday it would hold its interest rates steady for the time being, but indicated it was closely monitoring the economic fallout of the Iran war.

The ECB had raised rates last month and hinted at more to come, but a string of relatively calm data in the weeks that followed made a follow-up step seem less urgent.

Still, Thursday's decision came as oil futures prices once again briefly topped $100 per barrel and as more intense exchanges of fire between the US and Iran have again become a daily occurrence.

What did the ECB say about its rates decision?

The Frankfurt-based central bank for countries in the eurozone single currency area said that the outlook for energy prices was currently in line with projections from June, if well above the levels recorded prior to the conflict in the Middle East.

"Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out," the ECB said in a statement on its decision.

It said it was "therefore closely monitoring the intensity and the duration of the shock, as well as its indirect and second-round effects."

The ECB said it remained committed to its target of keeping inflation stable at or around "its 2% target in the medium term."

It said it would follow a "data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance," indicating that future increases were entirely possible if it deemed them necessary.

What are the eurozone interest rates at present?

The ECB's deposit facility, often considered the most important of its three base interest rates, currently stands at 2.25%. Its main refinancing operations rate is at 2.40% and its marginal lending facility is at 2.65%. This down from a peak of 4.5% reached in 2023 in the inflationary spiral of the aftermath of the COVID pandemic and Russia's invasion of Ukraine.

These rates are what the ECB charges moneylenders to borrow or deposit money. They are not the interest rates that ordinary borrowers and lenders pay for mortgages or receive on savings, but they can impact these rates considerably.

ECB President Christine Lagarde said in a press conference later on Thursday that "some governors" had mulled increasing the rate during this month's meeting.

"The energy shock could intensify further and its effects on other prices and wages could be stronger than currently expected. The longer energy prices stay high, the more likely they ​are to drive up broader inflation through indirect and second-round effects," Lagarde said.

But Lagarde also noted positive data in areas like employment figures, industrial activity and plans to boost European defense spending.

She said that most of the inflationary pressure was rooted in energy costs, rather than other essentials like food. Eurozone inflation dipped to 2.8% in June from 3.2% in May, but energy inflation stood at 8.5% and 10.8% in those two months.

Increasing interest rates is one of the tools available to central banks to try to contain inflation. The idea is that by making borrowing more expensive, it discourages non-essential borrowing and economic activity and thus applies negative pressure on demand and prices.