ECB Holds Rates Steady Amid Energy Shock Uncertainty

The European Central Bank (ECB) kept its three key interest rates unchanged on Thursday, as expected, but ECB President Christine Lagarde's tone was notably more cautious than the decision itself.

Lagarde emphasized how quickly geopolitical events have altered the central bank's projections. She highlighted energy prices, particularly oil, and revealed that the Governing Council spent two days reassessing everything since its June meeting.

The initial news had been positive: inflation slowed to 2.8%, economic activity held up better than forecast, and a US-Iran ceasefire drove crude oil prices sharply lower. However, the memorandum of understanding proved short-lived, and the conflict flared up again, leading to a renewed energy shock.

Lagarde stated that the full inflationary impact of the energy shock has yet to be felt, and policymakers are closely monitoring its intensity and duration along with any indirect or second-round effects. For now, she indicated that there is no evidence of companies responding with higher wage demands.