The European Central Bank held interest rates steady today after a closely watched meeting in which some governors raised the prospect of another increase.
Speaking at a press conference this afternoon, ECB President Christine Lagarde warned that the inflation outlook remained “well above target” through the first half of next year.
Following their deliberations, ECB governors voted unanimously to maintain rates at the current level of 2.25%.
The decision came against an increasingly volatile backdrop. As Ms Lagarde addressed reporters, oil surged beyond the $100-a-barrel threshold after Yemen’s Houthi rebels attacked oil tankers in the Red Sea.
Ms Lagarde said the ceasefire between the US and Iran had proved short-lived, triggering what she described as “serious developments on commodity markets”.
Natural gas prices, which had remained comparatively subdued in recent months, have also climbed to their highest level in more than three years, intensifying inflationary pressure.
“Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out,” the ECB said in a statement.
“The Governing Council is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects,” the ECB said.
“The outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the conflict in the Middle East,” the bank added.
The ECB increased rates in June and signalled that further action could follow. Since then, however, a run of relatively benign readings on prices, wages, economic activity and inflation expectations has reduced the urgency of an immediate follow-up move.
Investors are pricing in almost three additional interest rate increases over the next year, with an initial move fully expected by October and a second factored in by next February.
Those expectations appear to be driven more by energy markets than by the underlying economy. Most economists surveyed by Reuters believe the 21-country euro zone will require considerably less monetary tightening to restrain inflation, which could remain near 3% in the coming months — still above the ECB’s 2% target.
ECB governors unanimously agreed today to hold rates at their current level of 2.25%
No second-round effects yet
The ECB’s room to wait rests largely on one crucial development: the long-feared second-round consequences of soaring energy prices have not yet emerged.
Expensive energy typically filters through to the cost of goods and services, eventually prompting workers to seek larger pay increases and risking an inflationary wage-price spiral.
So far, wage growth continues to moderate, while the labour market remains relatively weak — especially in Germany, the euro zone’s largest economy. Companies surveyed by the ECB also expect pay pressures to become even more subdued.
Consumers have lowered their expectations for future price rises, and detailed data offer almost no sign of second-round effects. Services inflation, in fact, eased last month.
Beyond inflation, persistent trade tensions, elevated energy costs and China’s push into several of Europe’s most important export markets point to years of difficulty for the bloc’s industries, weighing on demand for workers.
Policymakers caution, however, that second-round effects may still arrive, even if they are weaker and slower than previously feared, leaving the ECB prepared to respond.
Extreme summer heat across much of Europe this month presents another possible threat.
High temperatures may have harmed crops and could drive food prices higher, while falling water levels along major rivers risk creating fresh shipping bottlenecks.
‘Captain Lagarde’ says she will remain aboard ECB ship amid early departure speculation
Meanwhile, European Central Bank President Christine Lagarde insisted today that she would remain in office next year, declaring that “the captain stays on the ship” when clouds gather on the horizon.
Yet when asked whether she would commit to serving her full term, which expires in October 2027, Lagarde said she did not like being “boxed in”.
“I did mention once: when there are clouds on the horizon, the captain stays on the ship, and this captain is staying on this ship,” Lagarde told today’s press conference.
“You are not going to see the back of me before 2027,” she added.
Earlier this month, Lagarde said she could still depart before her term concludes to play a role in French politics, although she stressed that entering next spring’s French presidential election was not “currently” under consideration.
Additional reporting Reuters
