ECB holds rates at 2.25% as oil raises inflation risks
The European Central Bank kept interest rates unchanged on Thursday, pausing after its June increase while officials assess how renewed Middle East hostilities will affect energy costs and inflation. The decision leaves the deposit rate at 2.25% and shifts attention to September, when policymakers will have additional economic data and updated forecasts.
Highlights
- The ECB held its deposit rate at 2.25%.
- Inflation eased to 2.8% in June.
- Brent crude rose to about $98 per barrel.
- September remains the leading window for another rate increase.
According to Bloomberg, the ECB maintained a meeting-by-meeting approach and avoided signaling a fixed path for borrowing costs. Markets continue to expect another quarter-point increase in September, followed by the possibility of further tightening before year-end as policymakers monitor the duration of the energy shock and its wider effect on prices.
Oil prices complicate the policy outlook
The pause follows a 25-basis-point rate increase in June, when the ECB became one of the first major central banks to respond directly to inflation pressure linked to the Iran war. The June move raised the deposit rate from 2% to 2.25%.
Since then, energy markets have remained volatile. Brent crude climbed to about $98 a barrel on Thursday after renewed fighting and attacks on two Saudi tankers near the Bab al-Mandeb Strait raised concerns about alternative export routes from the Gulf. Oil had traded near $76 before the collapse of a ceasefire arrangement earlier in July.
Euro-area inflation slowed to 2.8% in June from 3.2% in May, easing the immediate pressure for another increase. However, higher fuel and transportation costs could still spread into food, services, and manufactured goods if the conflict continues.
September emerges as the next decision point
The September meeting will give the ECB two additional monthly inflation readings, business surveys, and new staff projections. Its June baseline forecast placed average inflation at 3% in 2026, before slowing to 2.3% in 2027 and returning to the 2% target in 2028. Core inflation was projected to remain above target through the forecast period.
Bond and currency markets showed a limited response to the decision. The 10-year German Bund yield remained near 3.19%, close to its highest level since 2011, while the euro traded around $1.1390.
Energy risk keeps the ECB on alert
The decision reflects a difficult balance between slowing headline inflation and the danger of another sustained energy-price shock. With oil approaching $100 and the June inflation forecast already raised to 3%, the ECB has kept the option of further tightening open without committing in advance.
We have previously highlighted that the ECB selects 36 participants for the digital euro pilot.
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