The ECB leaves interest rates unchanged; the decision on a rate rise is postponed until September

Brussels – The situation is not ideal, as it remains characterised by significant uncertainty that appears far from resolved; however, macroeconomic conditions remain within the reference outlook and “at levels close to the baseline scenario” produced in June. For this reason, the
Governing Council

of the European Central Bank has decided to leave interest rates unchanged. This is a prudent decision that neither responds to the new geopolitical tensions—with the war in Iran having resumed with renewed vigour—nor succumbs to triumphalism about a situation that is, on the whole, considered manageable. “With today’s decision, the Governing Council remains in a favourable position to address the uncertainty caused by the conflict,” assures the ECB President, Christine Lagarde.

The interest rate on deposits with the central bank therefore remains at 2.25 per cent, the rate on main refinancing operations remains at 2.40 per cent, and the rate on marginal lending operations is confirmed at 2.65 per cent. Looking ahead, the Eurotower’s well-established approach remains unchanged: monetary policy decisions—and therefore whether and how to adjust interest rates—will follow a data-driven, case-by-case approach. In particular, Lagarde reiterates that the Governing Council’s decisions on interest rates “will be based on an assessment of the inflation outlook and the risks associated with it, taking into account new economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission, without committing to a specific path for interest rates.”

As things stand, the situation means that “the outlook for energy prices, although highly volatile, is currently at levels close to the baseline scenario of the projections made in June by Eurosystem experts and well above those recorded before the conflict in the Middle East,” notes the ECB President. Translated: “uncertainty remains high and the inflationary impact of the energy shock has yet to fully materialise.” This is why the Governing Council “is closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects.”

Decision on further increases postponed until September

It is, in fact, reiterated that the ECB remains ready to raise interest rates further if rising energy prices were to trigger an inflationary spiral. Because, ultimately, the institution remains committed to “setting monetary policy in such a way as to ensure that inflation stabilises at the 2 per cent target in the medium term,” including raising interest rates. 

ECB flags high energy prices this summer and inflation above target through mid-2027

“Some governors wondered whether it might be appropriate to consider the possibility of further rises, and therefore an increase in the three interest rates,” Lagarde admitted during the post-meeting press conference. “In the end, we unanimously decided to leave rates unchanged.” The debate, however, suggests that there are already plans to make monetary policy even more restrictive, and it cannot be ruled out that the ECB has decided to let everyone go on holiday with peace of mind and to postpone the decision on a possible further tightening of lending conditions until the meeting on 10 September.

“We are concerned, and if we were to base our decisions solely on concern, we would have raised interest rates,” Lagarde admits once again, thereby reiterating the data-driven nature of the decisions, while also acknowledging that the situation is not quite so rosy. She specifically mentions—though only because pressed by the press —the new attacks in the Red Sea by the Houthis, the Yemeni armed group that could add to the tensions and uncertainties already present. September will therefore be the time to take stock.

High energy prices remain a problem

The real issue to be resolved is the war in Iran, which “remains a major source of uncertainty,” and this means that, once again, “the risks to growth are on the downside and the risks to inflation are on the upside.” It is no coincidence, Lagarde continues, that “the leading indicators suggest that economic growth will remain modest in the short term, weighed down by the energy shock and the associated uncertainties.”