The European Central Bank has decided to keep interest rates at 4% amid high uncertainty due to the conflict in the Middle East. President Christine Lagarde warns that inflation will remain above target until the first half of 2027.
The Governing Council of the European Central Bank (ECB) decided on Thursday to keep the three official interest rates unchanged, in line with market expectations. The decision, announced after the meeting held in Frankfurt, leaves the main refinancing rate at 4%, the deposit facility at 3.75%, and the marginal lending facility at 4.25%.
ECB President Christine Lagarde explained at a press conference that the institution is closely monitoring the evolution of the conflict in the Middle East and its impact on energy prices. “The outlook for energy prices, although very volatile, is currently close to the baseline scenario of the June projections and well above the levels recorded before the conflict,” she stated.
Lagarde emphasised that uncertainty remains high and that the total inflationary impact of the energy shock has not yet fully manifested. “We are committed to setting monetary policy to ensure that inflation stabilises at our medium-term target of 2%,” she added.
Overall inflation in the eurozone decreased to 2.8% in June, down from 3.2% in May. However, the ECB expects inflation to remain clearly above target until the first half of 2027, due to the rise in energy prices since the start of the conflict and its transmission to food, goods, and services prices.
Core inflation, which excludes energy and food, moderated to 2.4% in June, down from 2.6% in May. Within this, goods inflation fell from 0.9% to 0.7%, while services inflation decreased from 3.5% to 3.2%.
Regarding economic activity, Lagarde indicated that recent data points to some improvement in the second quarter, although the conflict remains a burden. The services sector has partially recovered after the post-energy shock weakening, and digital services have shown resilience, partly driven by activity related to artificial intelligence. The manufacturing industry has remained stable, supported by stockpiling by companies to protect against supply chain risks and increased defence spending.
Unemployment stood at 6.2% in May, close to historical lows. However, job vacancies continue to decline, and both businesses and households expect the labour market to remain weaker than before the conflict.
Looking ahead, the ECB anticipates modest economic growth in the short term, weighed down by the energy shock and associated uncertainties. However, the fundamental drivers of medium-term growth remain intact: private consumption, investment in new digital technologies, public spending on defence and infrastructure, and some recovery in exports.
Lagarde reiterated the Governing Council's call for urgent action to strengthen the eurozone economy while maintaining sound public finances. “Simplifying and harmonising rules in the EU single market, accelerating the energy transition, and completing the savings and investment union are key elements,” she stated.
The president also referred to the progress of the digital euro, highlighting that the European Parliament's positive vote earlier this month was an important milestone. The ECB is confident of reaching an agreement on the Single Currency Package before the end of the year.
Regarding risks, Lagarde noted that growth prospects are skewed to the downside. The conflict in the Middle East remains the main source of uncertainty, and the ECB is closely monitoring the size and persistence of the rise in energy prices, as well as their transmission to prices and wages.
The ECB reiterated that it will adopt a data-dependent approach, meeting by meeting, to determine the appropriate direction of monetary policy, without committing in advance to a specific path of rates.
For Spanish businesses and households, the ECB's decision means that the cost of credit will remain high for longer than initially expected. Variable mortgage rates, linked to the Euribor, will remain elevated, and business financing will continue to be expensive. The ECB expects inflation not to fall below 2% until well into the second half of 2027, delaying any significant relief in families' purchasing power.
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