ECB leaves interest rates unchanged: “Longer-term inflation expectations remain well anchored”

Brussels – “Longer-term inflation expectations remain well anchored, although inflation expectations over shorter horizons have moved up significantly.” These considerations led the European Central Bank’s Governing Council to keep interest rates unchanged. Despite the sharp rise in inflation driven by higher energy costs, the decision, just as in March, is once again to refrain from tightening monetary policy.

The interest rate on deposits with the central bank, therefore, remains at 2 per cent, the rate on main refinancing operations remains at 2.15 per cent, and the rate on marginal lending operations is confirmed at 2.40 per cent. The pause that began in July continues, as the ECB keeps its composure and maintains the calm, responsible approach underpinning its decisions — decisions that are, in any case, far from easy.

The ECB President, Christine Lagarde, acknowledges that “the war in the Middle East has led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment.” This is not enough to understand where the eurozone will end up, because “the implications of the war for medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock and the scale of its indirect and second-round effects.” This implies that in Frankfurt, business will continue as usual: decisions will be made on a case-by-case basis, based on data, without “pre-committing to a particular rate path.”

 Decisions on interest rates, Lagarde goes on to explain, “will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission.” For the time being, there are no risks that would justify raising the cost of borrowing, not least because, as the ECB President is keen to point out, “the Governing Council remains well positioned to navigate the current uncertainty.​” Furthermore, the euro area economy “has shown resilience over recent quarters.” 

However, subsequent increases cannot be excluded, given the persistent and hard‑to‑manage uncertainty. “The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy,” according to the Governing Council members. This means that rates could be raised if the situation worsens or fails to improve.