The European Central Bank kept its three key interest rates unchanged on Thursday as it monitored the inflation impact of a volatile rise in energy prices linked to the conflict in the Middle East.
Energy prices were still “highly volatile” and remained well above levels seen before the conflict, with the full effect on inflation yet to be felt, the ECB said in a statement by its President Christine Lagarde and its Vice-President Boris Vujcic.
The bank said it would continue to decide policy “meeting-by-meeting” and based on incoming economic and financial data, adding that it was not committing in advance to a particular path for rates.
Inflation eases, but energy remains a concern
Inflation in the euro area slowed to 2.8% in June from 3.2% in May, with energy inflation easing to 8.5% from 10.8% over the same period, the ECB said.
Food price inflation fell to 1.5% from 1.9%, while inflation excluding energy and food — a common way of looking at underlying price pressures — edged down to 2.4% from 2.6%.
The ECB said the energy shock was still feeding into higher prices, with firms reporting that it was becoming more expensive to source inputs and that they expected to raise selling prices.
The central bank said inflation was likely to remain above its 2% target into the first half of 2027 because of the rise in energy prices since the conflict began and its knock-on effects on other prices.
On the economy, the ECB said recent information pointed to “some improvement” in activity in the second quarter, though the conflict remained a drag. Unemployment stood at 6.2% in May, close to historical lows, while job postings continued to fall.
Financial conditions had tightened slightly since the previous meeting, the ECB said, with bank lending rates for firms unchanged in May at 3.6% and mortgage rates rising to 3.5% from 3.4%.
The ECB reiterated that it remained ready to adjust its tools within its mandate to ensure inflation stabilised at its medium-term target.
