The European Central Bank keeps interest rates unchanged, but Lagarde's message makes it clear that a new hike in September is possible if energy inflation and economic data demand it.
The European Central Bank (ECB) has decided to keep its three official interest rates unchanged, in a pause that the markets had already anticipated. However, President Christine Lagarde made it clear that the tightening cycle is not over and that September will be a key date to decide whether a new hike will be implemented.
The deposit facility rate remains at 2.25%, the main refinancing operations rate at 2.40%, and the marginal lending facility rate at 2.65%. The Governing Council opted not to change the rates, but the subsequent statement emphasises that the decision in September will depend on inflation data, energy prices, and economic developments.
The context for the eurozone remains complex. Inflation had shown some moderation, but the rise in energy prices—especially oil and gas—and geopolitical uncertainty due to the conflict in the Middle East have reignited alarms in Frankfurt.
The ECB is not tying its hands
With this pause, the ECB aims to buy time without losing credibility. It does not raise rates immediately, but it also does not offer respite to the markets. The message is deliberately ambiguous: the next meeting in September will be the time to assess whether inflation threatens to drift away from the 2% target.
The institution insisted that it will continue to monitor wage developments, energy prices, economic growth, and the transmission of monetary policy. In practice, the ECB is not committing to anything and reserves the option to raise or maintain rates based on the data.
Energy, the major risk factor
The main change in the European economic landscape is energy. The ECB points out that energy prices remain volatile and are above pre-conflict levels in the Middle East. This increases the risk that the shock will spill over into transport, food, industrial production, and services.
The eurozone is particularly sensitive to energy shocks due to its dependence on imports. If energy prices remain high for longer, companies may pass those costs onto consumers, generating more persistent and harder-to-control inflation.
For the ECB, raising rates does not produce oil or reduce gas prices, but it can cool demand and moderate expectations, preventing the initial shock from turning into a spiral of prices and wages.
What the ECB will monitor until September
The decision in September will depend on several factors. The first is the price of oil: if it remains high, it will pressure transport, food, and industrial goods. The second is core inflation, which excludes energy and food and measures underlying pressures. The third is wages: persistent increases could fuel inflation in services. And the fourth is economic growth: a weak economy limits the scope for further tightening of monetary policy.
The ECB has already warned that the main risk is that the energy shock does not remain confined to fuels but ends up spilling over into goods, services, wages, and inflation expectations. Therefore, although there is now a pause, the door to a hike in September remains open.
What it means for households and businesses
For European households, high interest rates translate into more expensive or less accessible credit. Variable mortgages, consumer loans, and bank financing may remain under pressure if the ECB maintains a restrictive stance. Those who need to renew their mortgage or take out a loan in the coming months should anticipate that rates will not decrease in the short term.
For businesses, especially SMEs, the cost of credit remains high. Financing for investments or working capital becomes more expensive, which can hinder projects and slow down economic activity. The ECB is aware of this impact but prioritises its goal of controlling inflation.
The decision in September will be crucial. If the ECB opts to raise rates, the message will be that inflation remains a threat and that tightening will continue. If it maintains the pause, the markets will interpret it as a sign that the economy is cooling sufficiently. For now, uncertainty remains the dominant theme.
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