On Thursday 23 July, the Governing Council decided unanimously to keep the European Central Bank (ECB)’s three main key interest rates unchanged. Following the 25-basis-point increase decided in June (see EUROPE 13886/6), the deposit facility rate, the main refinancing operations, and the marginal lending facility thus remain at 2.25%, 2.40%, and 2.65% respectively.
“The analysis that we conducted, fed by staff work analysis, really looked into what has happened since June”, ECB President Christine Lagarde explained at a press conference, referring to “some relatively benign development” over the past six weeks.
On the one hand, observed inflation was lower than anticipated: 2.8% in the euro area, compared to the ECB’s initial projections of 3.2%, Ms Lagarde noted. On the other hand, with the exception of Ireland, euro area economic activity grew by around 0.3%. Lastly, the Memorandum of Understanding concluded prior to the US-Iran ceasefire led to a significant fall in crude oil prices, “probably faster than we had anticipated”, the President also noted.
However, the recent resumption of hostilities in the Middle East led the Governing Council to focus its two-day meeting on growing tensions in commodity markets. “We really applied the method that we have agreed amongst ourselves in such a shock, which is to really try to understand the intensity, the durability, and the propagation effects of the supply shock. That’s what led us to take the decision that we took this morning”, the ECB President said.
Could a September rate rise lie ahead? On Thursday, Ms Lagarde didn’t rule out a further interest rate rise at the next governors meeting on 9 and 10 September, saying that in the coming weeks, the monetary institute would carefully examine new data, such as updated monthly inflation figures; GDP growth in the second half of the year; data on compensation per employee; and economic indicators on the financial health of industry and services.
“We will be applying our normal reaction function, inflation outlook, the risk associated with it, the underlying inflation, transmission, and we will be again measuring the intensity, the duration, and the propagation of the shock throughout the economy”, said the President of the Frankfurt-based institute.
Speculation over Ms Lagarde’s possible early departure. Christine Lagarde once again dismissed speculation over an early end to her mandate at the head of the ECB. “You are not going to see the back of me before 2027, okay? 2027, my dear, okay?”, she joked on Thursday afternoon when questioned by a journalist. “When there are clouds on the horizon, the captain stays on the ship, and this captain is staying on this ship”, she continued.
The President’s mandate is due to last until October 2027. However, Ms Lagarde hasn’t ruled out taking a stand in the context of the French presidential election in April 2027 (see EUROPE 13903/20).
See the Governing Council’s monetary policy decision: https://aeur.eu/f/n01 (Original in French by Bernard Denuit)