“Uncertainty remains high”: ECB leaves key interest rates at 2.25 percent

The ECB paused after the interest rate hike in June and at the same time demonstrated determination in the fight against it high inflation. The deposit rate will remain at 2.25 percent, the ECB Governing Council announced on Thursday. The monetary authorities around the head of the ECB had this lever to control monetary policy Christine Lagarde put on in June for the first time in almost three years. Inflation in the euro area, driven by the Iran conflict, recently fell to 2.8 percent, but remains elevated.

The Governing Council remains vigilant: “Uncertainty remains high and the impact of the energy shock on inflation has not yet fully materialized.” It is firmly decided to align monetary policy in such a way that the inflation rate stabilizes at the target value of 2 percent in the medium term.

Rise in oil prices

Reports of attacks on oil tankers in the Red Sea by Yemeni Houthis, allied with Iran, and the escalating situation in the Iran war have recently catapulted oil prices to their highest level since the beginning of June. The central bank is in a difficult situation, says Maximilian Wienkemarket analyst at the trading platform eToro: “If the price of oil stays permanently above 90 dollars (79 euros) per barrel, the specter of inflation could return faster than many would like.”

What will be crucial is how Lagarde classifies the rise in oil prices. In the past, the 70-year-old has repeatedly emphasized that the ECB does not have to react to every short-term supply shock. “The question now is whether they continue to view the recent increase as a temporary event or see signs of permanent inflationary pressure,” said Wienke.

Under no circumstances do the central bankers in the Frankfurt ECB tower want things to go back to the situation in 2022, when Russia’s invasion of Ukraine triggered a surge in inflation that was initially underestimated. Now danger threatens again: because of those fueled by the Iran war high energy costs for consumers and companies run the risk that wages and prices will push each other up, further driving up inflation.