The European Central Bank (ECB) left interest rates unchanged at 2.25 per cent on Thursday but policymakers discussed a further increase in borrowing costs amid a renewed surge in oil prices.
ECB president Christine Lagarde said the widely expected decision was unanimous but there were some members of its governing council “who asked themselves whether we should not consider a hike”.
The bank also left its refinancing rate, which is used to price tracker mortgages, unchanged at 2.4 per cent.
Last month, the ECB lifted borrowing costs by a quarter point, becoming the first central bank in the G7 to tighten monetary policy in response to sharp increases in energy costs triggered by the conflict in the Middle East.
RM Block
Lagarde told journalists that policymakers had decided to hold “our rates for the moment” but warned that the breakdown of the ceasefire between the US and Iran has led to “serious developments” on the commodity markets.
“Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out,” she said.
Since early July, oil prices have gained more than 30 per cent as the US-Iran ceasefire has collapsed and shipping traffic remains heavily constrained in the Strait of Hormuz.
On Thursday, oil prices hit $100 a barrel for the first time since May after Iran-backed Houthi militants claimed they attacked two Saudi Arabian tankers in the Red Sea, creating further disruption to crude supply.
Lagarde called the latest developments in the Red Sea “alarming” and said they were already having “an impact”, as she warned of the risk that inflation could overshoot projections and may have larger than expected knock-on effects on other parts of the economy.
The ECB forecast last month that inflation in the Eurozone would peak at 3.4 per cent in the second half of the year, well above its 2 per cent medium-term target, and remain at about 3 per cent in early 2027.
Lagarde stressed that the central bank was “closely monitoring the intensity and duration” of the energy shock, adding that it was “well positioned to navigate the uncertainty caused by the conflict”.
The ECB president also addressed questions about when she will leave the central bank, ruling out a departure this year.
“You are not going to see the back of me before 2027,” she told journalists, although she declined to commit to staying until the end of her eight-year term, which will end in October next year. “I hate to be boxed in” by any particular circumstances, she said. She had said in an interview in June that an early departure was “possible” if inflation calms down.
Karsten Junius, chief economist of Bank J Safra Sarasin, said Lagarde’s comments on monetary policy leave “the door wide open for another rate hike in September”.
Traders are betting that the ECB will raise borrowing costs further. Swap markets have fully priced in two more quarter-point rate increases by the first quarter of next year and expect the next move in either September or October.
Francesco Pesole, FX strategist at ING, said the ECB’s reference to the inflationary impact of the shock needing to play out was an attempt “to keep markets leaning hawkish”.
The euro weakened slightly against the dollar after the expected decision, down 0.3 per cent at $1.137, but was little changed against the pound. – Copyright The Financial Times Limited 2026
