ECB maintains interest rates and emphasizes data-dependent approach

Christine Lagarde, President of the ECB, and Boris Vujčić, Vice-President, announced that the Governing Council has decided to keep the three key ECB interest rates unchanged.

The ECB highlighted that energy prices remain volatile and above pre-conflict levels, with uncertainty high. The Governing Council is monitoring the energy shock’s impact and its second-round effects, reaffirming its commitment to achieving a 2% inflation target in the medium term.

The ECB will adopt a data-dependent, meeting-by-meeting approach for monetary policy decisions, assessing inflation outlook and risks without pre-committing to a specific rate path. The decision details are available in a press release on the ECB website.

Economic activity showed some improvement in the second quarter, despite headwinds from the Middle East conflict. Services sector activity has partly recovered, supported by digital services and increased defense spending. Manufacturing remains resilient, with firms stockpiling inputs amid supply chain risks. Unemployment was 6.2% in May, with job postings declining and expectations of a weaker labor market.

Growth is expected to remain modest in the near term due to energy shocks and uncertainties, but medium-term drivers such as private consumption, digital investment, and exports remain intact. The ECB emphasizes the need for urgent action to strengthen the euro area economy, including reforms, energy transition, and completing the digital euro project.

Inflation declined to 2.8% in June from 3.2% in May. Energy price inflation fell to 8.5%, food inflation to 1.5%, and core inflation measures eased slightly. The energy shock continues to influence prices, with firms expecting to raise prices, though underlying inflation remains contained. Inflation expectations are around 2% in the long term.

Inflation is projected to stay above target into the first half of 2027 due to persistent energy prices, but should decline thereafter as energy prices fall and other prices slow. Risks to growth are downside, including geopolitical tensions and energy supply disruptions, but upside risks include faster adaptation to conflicts and technological advancements. Inflation risks are to the upside, with potential for further energy price increases and supply chain disruptions, but could be lower if conflicts resolve or effects are less pronounced.

Financial conditions have tightened slightly, with bank lending rates for firms at 3.6% and mortgage rates at 3.5%. Credit standards for loans and mortgages have tightened amid economic risks and higher interest rates. Demand for loans remains supported by firms’ need for working capital and investment, while mortgage demand has decreased due to consumer confidence and rate increases.

The Governing Council reaffirmed its commitment to maintaining interest rates and adjusting instruments as needed to ensure inflation stabilizes at 2%, emphasizing a flexible, data-driven approach to monetary policy.

The ECB stands ready to act within its mandate to support price stability and the smooth functioning of monetary policy transmission.

The press conference concluded with an invitation for questions.