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The European Central Bank left interest rates unchanged at 2.25 per cent on Thursday, despite a renewed surge in oil prices.
The widely expected decision comes six weeks after the ECB lifted borrowing costs by a quarter point, becoming the first central bank in the G7 to tighten monetary policy in response to sharp increases in energy costs triggered by the conflict in the Middle East.
“Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out,” the central bank said in a statement.
Since early July, oil prices have gained more than 30 per cent as the ceasefire between the US and Iran has collapsed and shipping traffic remains heavily constrained in the Strait of Hormuz.
On Thursday, oil prices rose above $99 a barrel for the first time since late May after Iran-backed Houthi militants claimed they attacked two Saudi Arabian tankers in the Red Sea, creating further disruption to crude supply.
The ECB said that the outlook for energy prices, “while highly volatile”, was currently close to its baseline projection published last month, which implied that inflation would peak at 3.4 per cent in the second half of the year and remain at about 3 per cent in early 2027.
Inflation in the Eurozone has risen well above the ECB’s medium-term target of 2 per cent since March but eased slightly to 2.8 per cent in June, when oil prices fell sharply in response to hopes at the time of resolving the conflict between Washington and Tehran.
The ECB stressed that it was “closely monitoring the intensity and duration” of the energy shock, as well as ripple effects that higher oil and gas prices may have in other parts of the economy. It added that it was “well positioned to navigate the uncertainty caused by the conflict”.
Karsten Junius, chief economist of Bank J Safra Sarasin, said the central bank’s statement on Thursday “leaves the door wide open for another rate hike in September”.
Traders are betting that the ECB will raise borrowing costs further. Swap markets have fully priced in two more quarter-point rate increases by the first quarter of next year and expect the next move in either September or October.
Francesco Pesole, FX strategist at ING, said that the ECB’s reference to the inflationary impact of the shock needing to play out was an attempt “to keep markets leaning hawkish”.
The euro weakened slightly against the dollar after the expected decision, down 0.2 per cent at $1.139, but was flat against the pound.
Additional reporting by Ian Smith
