Main refi rate unchanged at 2.15%, deposit rate unchanged at 2.00%Rates held steady as policymakers flag rising energy-driven inflation risks
Middle East tensions push energy prices higher, complicating disinflation outlook
No pre-commitment on rate path as data-dependent stance remains intact
Short-term inflation expectations rise while longer-term views stay anchored
Says ypside inflation risks and downside growth risks both intensify
Policy seen as well positioned despite growing geopolitical uncertainty
Economy described as resilient entering latest energy price shock
Quantitative tightening continues with predictable balance sheet runoff
Financial conditions remain restrictive after prior tightening cycle
Decision underscores wait-and-see approach amid shifting risk balance
The euro is initially lower on the headlines after the European Central Bank left rates unchanged. The market is pricing in a 75% chance of a hike in June and this week’s moves in energy prices certainly underscore the inflation risk.
In the decision, the Governing Council left policy unchanged, maintaining the deposit rate at 2.00%, the main refinancing rate at 2.15%, and the marginal lending facility at 2.40%, in line with expectations. The statement didn’t commit to easing perhaps as much as some expected and that’s why the kneejerk in the euro was lower, but we still have Lagarde later.
The key shift in tone centered on rising uncertainty tied to energy markets and geopolitical risks. Policymakers highlighted that the war in the Middle East has driven a sharp increase in energy prices, with potential second-round effects on inflation. While longer-term inflation expectations were described as well anchored, the ECB acknowledged that shorter-term expectations have moved up significantly, complicating the disinflation narrative.
Importantly, the ECB framed the current environment as a balance of intensifying risks: upside risks to inflation alongside growing downside risks to economic growth. The reference to the euro area entering this period of higher energy prices with inflation near target and a resilient economy suggests policymakers see some buffer, but not immunity, to further shocks.
On balance sheet policy, the ECB reiterated that APP and PEPP portfolios are declining in a measured and predictable way, reinforcing ongoing quantitative tightening. Financial conditions remain restrictive, and the Council expressed confidence that it is well positioned to navigate current uncertainty.
Overall, the decision reflects a central bank in wait-and-see mode. While the baseline disinflation trend remains intact, the re-emergence of energy-driven inflation risks is a big problem.