ECB vs. inflation

ECB leaves key interest rate unchanged

The Governing Council of the European Central Bank decided at its meeting on Thursday to leave interest rates unchanged.

The deposit rate thus remains at 2.25 percent and the key interest rate (refinancing rate) at 2.40 percent. Both announcements were expected.

“Uncertainty remains high and the full inflationary effect of the energy shock has not yet played out,” the ECB wrote in a press release.

After the increase in June, there was a broad consensus among investors ahead of today’s announcement that the deposit rate should be left unchanged at 2.25 percent. Instead, the market is listening for signals about when the next increase will come.

“The ECB should keep the key interest rate at 2.25 percent, but we see a hike in September as likely, especially as oil prices rise again,” ING Economics wrote in a client letter this morning, according to Nyhetsbyrån Direkt.

The market expects between two and three interest rate hikes from the ECB, with the first priced in in October and the second in April next year.

Economists: Oil will determine whether the ECB raises interest rates this fall

The ECB's decision to leave key interest rates unchanged was logical as inflation continues to fall, writes ING's macro chief Carsten Brzeski in a commentary. But with the skyrocketing energy prices, a new interest rate hike in September is almost a sure thing.

"If the oil price does not start to fall clearly in the coming weeks, the ECB's own macro forecasts in September will clearly point to another interest rate hike," writes Brzeski.

SEB's macro strategists Amanda Sundström and Olle Holmgren note that the ECB still does not see any spillover effects from higher energy prices to broader inflation, while growth risks weakening.

"We therefore assess that the ECB may well leave the interest rate unchanged for the rest of the year," they write, but flag that developments in the Middle East will be decisive.