The latest meeting of the Governing Council of the ECB once again took place against a backdrop of conflict in the Middle East. This is still ongoing, notwithstanding a brief interlude of reduced intensity, and its outcome remains uncertain. For now the impact is materially evident in selected economic indicators, most notably elevated inflation, while economic growth in the euro area remains stable in general. The risks remain elevated going forward.
Under these circumstances the Governing Council of the ECB decided to leave interest rates unchanged at the latest meeting, having raised them by 25 basis points at the previous meeting in June. The interest rate on the deposit facility, which best reflects the monetary policy stance, thus remains at 2.25%. We will maintain our approach to future decision-making, deciding on monetary policy measures on a meeting-by-meeting basis.
The economic picture in the euro area remains highly subject to events in the Middle East, where the recent renewed escalation of the conflict is strengthening the adverse risks. The latest macroeconomic data shows that the effects of the energy shock are continuing to be reflected most evidently in higher inflation, while economic activity remains stable in general. Inflation in the euro area fell to 2.8% in June, largely in reflection of a slowdown in energy price inflation, amid a slight fall in core inflation and food price inflation. The slowdown in energy price inflation was attributable to the sharp fall in oil prices on global markets following the truce between the US and Iran, but the recent escalation of the conflict has once again driven a sharp uptick in energy prices. Meanwhile the monthly economic indicators show that after a pronounced deterioration following the outbreak of the conflict, the situation in the euro area economy actually improved during the second quarter. Economic growth continues to be supported by rising private consumption, investment in new digital technologies, government investment in defence and infrastructure, and a partial recovery in exports.
The financial markets have seen energy prices stay high and volatile, while broader commodity price indices also remain at high levels. The market expectations with regard to short-term and medium-term inflation are broadly unchanged: they remain elevated, and like the baseline scenario of the Eurosystem’s June projections have priced in a gradual fall in inflation towards its 2% target rate over the coming years. The markets are therefore expecting further rises in the ECB’s key interest rates in the second half of 2026. Yields on euro area government and private-sector bonds remain up on their levels before the outbreak of the conflict in the Middle East, with yields on government bonds also being affected by the anticipated large supply of new government bond issuance at the global level. Risk premiums in the private-sector bond segment remain squeezed by contrast, with low volatility. Global share indices are high, supported by expectations of solid earnings reports.
In light of this data, the Governing Council decided at yesterday’s meeting to leave interest rates unchanged. The interest rate on the deposit facility, which best reflects the monetary policy stance, thus remains at 2.25%. The Governing Council’s future decisions will remain focused on seeing inflation stabilise at its 2% target rate over the medium term. The next steps will be based on an assessment of the inflation outlook and the risks surrounding it, the dynamics of underlying inflation, and the strength of monetary policy transmission. The monetary policy stance will continue to be decided on a meeting-by-meeting basis.