ECB Keeps Interest Rates on Hold

Today, in an unanimous decision, the ECB’s (European Central Bank) Governing Council voted to keep its Benchmark deposit facility rate on hold at 2.25%. The main financing operations rate and the marginal facility were also held steady at 2.4% and 2.65% respectively*. After last month’s rate hike of 25 basis points, experts suggest that a rate increase is on the table at the governing councils next interest rate meeting on September 13th – 14th in Frankfurt main. 

*ECB Interest Rates – The ECB has three interest rates; the Key Deposit Rate is the interest rate banks receive when they deposit money overnight with the ECB. The other two facilities are the Main Refinancing Operations, which is the rate the banks pay when they borrow money from the ECB for one week, and the Marginal Lending Facility is the rate banks pay when they borrow money overnight from the ECB.

Indeed, after the interest rate announcement, ECB President Christine Lagarde announced that there could be a possible rate hike in September having rejected a move to increase rates today. She went on to say, “we were positioned adequately  to wait and be very attentive in the next few weeks to the development of the situation and to the data that we will be receiving in the next few weeks”. Although the decision was unanimous, President Lagarde noted that there were some governors who asked themselves whether we should consider a hike in interest rates. 

As the ECB held their meeting, crude oil prices once again hit the $100p/bl mark for the first time since March this year after Iranian backed Houthi militia claimed responsibility for attacking two Saudi Arabian tankers in the Red Sea, which will create further disruption in the supply of crude oil. President Lagarde has referred to the Houthi attack as an alarming warning that inflation projections could be higher than expected, but pointed out that the ECB was well positioned to navigate the uncertainty caused by the present conflict.

President Lagarde also pointed out that the central bank has yet to see signs of second-round inflation effects*. Indeed, the President added that if the bank were only concerned about second-round effects, the ECB would have today hiked interest rates, and she was quoted as saying, “ we are not at that stage where we’re seeing those emergent signs of second-round effects”. Experts suggest that the September meeting is considered the natural point to deliver a rate increase as there will be more economic data, including inflation for two months and various business surveys.

*Second Round Effects – In these scenarios, second round effects are price and wage-settings stemming from the current shock that have the potential to raise Eurozone inflation beyond the near-term in a persistent manner.

Indeed, analysts advise that the swaps market implies that a 25 basis points increase in interest rates is a near certainty with financial markets fully pricing in a further increase in interest rates in December. Lagarde finished by noting that “the full effects of the energy shock have yet to play out, however energy price inflation had declined in June that it had risen since the start of the conflict and its impact on food, goods, and services is likely to keep inflation well above target into 2027”.