The European Central Bank kept borrowing costs unchanged on Thursday as policymakers assessed the potential impact of rising energy prices linked to a widening conflict in the Middle East.
The ECB maintained its benchmark deposit rate at 2.25%.
However, the central bank left room for further monetary tightening in the coming months.
The decision comes as renewed pressure on energy prices adds to uncertainty over the inflation outlook.
The ECB said it was “closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects”.
The central bank’s assessment reflects concerns that higher energy prices could eventually feed into broader inflation pressures.
ECB warns of uncertain inflation impact
The central bank said the outlook for energy prices remained highly volatile.
It added that current energy price levels were close to the baseline of the June Eurosystem staff projections.
However, those levels were still well above prices recorded before the conflict in the Middle East.
“The outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded before the conflict in the Middle East,” the ECB said in a press release.
The central bank also highlighted the uncertainty surrounding the broader economic consequences of the energy shock.
“Uncertainty remains high, and the full inflationary impact of the energy shock has yet to play out.”
The comments indicate that policymakers are continuing to assess how long the energy price shock could last.
They are also watching how the initial increase in energy costs could affect inflation through indirect and second-round effects.
Markets price in further rate hikes
Financial markets are pricing in roughly two more interest rate hikes by the end of the year.
The first of those moves is expected to come at the ECB’s next meeting on September 9-10.
The market expectations come despite a recent period in which policymakers have had less urgency to raise rates again.
The ECB raised rates for the first time in nearly three years in June.
Since then, a series of relatively benign data releases has reduced pressure for an immediate follow-up move.
The data covered prices, wages, economic activity and inflation expectations.
Policymakers have also called for patience as they assess incoming economic information and the evolving inflation outlook.
The latest decision therefore keeps borrowing costs unchanged for now.
At the same time, the ECB’s comments suggest that future decisions will depend heavily on developments in energy prices and the broader inflation impact of the Middle East conflict.
ECB keeps other borrowing rates unchanged
Thursday’s decision also left unchanged the rates at which banks can borrow from the ECB for different periods.
The rate for overnight borrowing remained at 2.65%.
The rate for one-week borrowing stood at 2.40%.
The unchanged rates come as the central bank continues to monitor the economic effects of higher energy prices and the wider uncertainty surrounding the conflict.
For now, the ECB has maintained its benchmark deposit rate at 2.25%.
However, its warning over the potential inflationary impact of the energy shock keeps the possibility of further tightening in focus.
With financial markets already pricing in roughly two additional rate increases before the end of the year, attention will remain on upcoming economic data and the development of energy prices ahead of the ECB’s September meeting.
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