ECB leaves three key interest rates unchanged, as expected
The effects of the Middle East war on the European economy, with an emphasis on inflation and economic activity, were addressed by ECB President Christine Lagarde during the press conference following the Governing Council meeting. During the session, interest rates were kept unchanged amid heightening geopolitical and economic uncertainty.
Regarding the possibility of an interest rate hike in June, the ECB President did not provide a direct answer. However, she maintained that the Governing Council members believe the six weeks intervening until the next meeting on June 11 will be the "appropriate time" to assess and understand the outcome, or lack thereof, of the conflict with Iran.
The ECB President underlined that the medium-term consequences of the war will depend largely on the intensity and duration of disruptions to energy prices. At the same time, she emphasized that a critical factor for the trajectory of inflation and growth will be the extent of the indirect and secondary effects that emerge within the economy.
Lagarde sent a message of increased uncertainty for the coming period, pointing out that the environment remains fragile, with energy pressures acting as a key determining factor for inflationary trends and the dynamics of economic activity in the eurozone. The ECB President avoided indicating that the central bank is close to any specific monetary policy scenario, noting that while there is a clear shift from the baseline, the overall picture remains fluid.
As she stated, uncertainty remains high regarding which assessment of economic data is most appropriate at this time, with decisions being made based on available data, which nevertheless remains incomplete. The ECB President stressed that the most critical element for future developments is the impact of energy prices on the economy, noting that the situation is now clearly moving away from the baseline scenario and entering a phase of increased divergence and volatility.
Due to high levels of uncertainty, all issues will need to be re-examined at the next ECB meeting. As she mentioned, the six-week horizon is considered sufficient to evaluate progress and the new data that will have emerged. Furthermore, she noted that the decision-making process remains heavily data-dependent, with the ECB not pre-judging any outcome, as conditions could change significantly in the interim.
She also recognized that within the Governing Council, there may be different or even conflicting views among members regarding policy proposals, a fact that reflects the complexity and uncertainty of the current economic environment.
Inflation above target
The head of the ECB warned that inflation is expected to remain significantly above the 2% target in the near term, reflecting ongoing price pressures and the persistent effects of the energy and geoeconomic environment. At the same time, she underscored that risks to economic growth remain tilted to the downside, as uncertainty, high energy costs, and secondary effects on businesses and households may limit the momentum of economic activity in the eurozone.
The ECB President noted that underlying inflation has shown little change in recent months, suggesting that core inflationary pressures remain largely persistent. As she emphasized, although there may be fluctuations in individual indicators, the overall picture shows limited cooling of underlying price pressures, a fact that keeps the European Central Bank's attention fixed on its monetary policy and future inflation decisions.
Additionally, she stressed that the green transition is becoming "more important than ever," pointing out that investments toward a more sustainable and resilient economy are not only an environmental priority but also a critical factor for Europe's long-term economic stability.
Targeted and temporary interventions
The ECB President pointed out that fiscal interventions must be temporary, targeted, and tailored to the needs of the situation, so they effectively support the economy without creating permanent imbalances. Lagarde underlined that the digital euro will strengthen Europe's strategic autonomy, emphasizing the need for rapid adoption of relevant legislation to allow for its smooth introduction.
The ECB President also noted that the eurozone starts from a relatively favorable position, which provides a degree of "buffer" against current challenges, although the environment remains fragile and requires prudent economic management.
Tight environment for businesses and households
Lagarde pointed out that credit conditions in the eurozone have tightened, with the financial environment becoming more restrictive for businesses and households. She also underscored that, in practice, interest rates have "increased indirectly" under the weight of supply shocks, primarily due to the energy crisis and broader disruptions in the economy.
In the same context, Lagarde highlighted that the core problem is not limited to monetary policy, but is related more to the weakness of demand, which is affected by high costs, uncertainty, and the slowdown in economic activity. Despite the interest rate cuts implemented since mid-2024, eurozone growth remains sluggish, highlighting the limits of monetary policy in an environment primarily characterized by supply disruption.
The ECB itself recognizes that its available tools are being tested intensely, as structural pressures and external shocks continue to limit the economy's momentum.
ECB rates unchanged – Fears over Middle East war as inflationary pressures loom
As expected, the European Central Bank kept its three key interest rates unchanged, as while incoming information is broadly consistent with the Governing Council's previous assessment of the inflation outlook, upside risks to inflation and downside risks to growth have become more pronounced. The Governing Council is committed to determining monetary policy to ensure that inflation stabilizes at the 2% target over the medium term.
The war in the Middle East has led to a sharp increase in energy prices, providing upward momentum to inflation and negatively affecting the economic climate. The consequences of the war for inflation and economic activity in the medium term will depend on the intensity and duration of the energy price disruption and the extent of its indirect and secondary effects.
The longer the war lasts and energy prices remain at high levels, the more intense the potential impact will be on headline inflation and the economy.
Uncertainty
The Governing Council is in a position to manage the current uncertainty. The euro area entered this period of sharp increases in energy prices with inflation around the 2% target, and the economy has proven resilient in recent quarters.
Longer-term inflation expectations remain anchored, although inflation expectations over shorter horizons have shifted significantly upward. The Governing Council will closely monitor the situation, following a data-dependent approach and making decisions meeting-by-meeting to determine the appropriate direction of monetary policy.
Specifically, its interest rate decisions will be based on its assessment of the inflation outlook and the surrounding risks, in light of incoming economic and financial data, as well as the dynamics of underlying inflation and the intensity of monetary policy transmission. The Governing Council does not pre-commit to a specific interest rate path.
Key ECB interest rates
The interest rates on the deposit facility, the main refinancing operations, and the marginal lending facility will remain unchanged at 2.00%, 2.15%, and 2.40% respectively.
Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP)
The APP and PEPP portfolios are declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal amounts from maturing securities.
Inflation target
The Governing Council stands ready to adjust all instruments within its mandate to ensure that inflation stabilizes at the 2% target over the medium term and to safeguard the smooth functioning of the monetary policy transmission mechanism.
Furthermore, the Transmission Protection Instrument (TPI) is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to fulfill its price stability mandate more effectively.
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