The ECB leaves rates unchanged, but does not declare the battle against inflation over. At the end of the meeting on 23 July, the Governing Council confirmed the deposit rate per 2.25%, that on main refinancing operations at 2.40% and that on marginal loans at 2.65%. The choice was widely expected, after the 25 basis point increase decided in June.
The real news, however, is in the message with which Christine Lagarde accompanied the decision: “The full inflationary impact of the energy shock has yet to manifest itself.” Oil and gas remain at high and very volatile levels, while the conflict in the Middle East continues to make the economic scenario fragile.
The ECB is taking time, but keeps open the possibility of intervening on rates again.
Because the ECB left rates unchanged
The break decided in July was born from a delicate balance. On the one hand, inflation in the euro area has shown signs of slowing, together with a moderation in wages and economic activity. On the other hand, the new energy rush risks reigniting price pressures in the coming months.
According to the ECB, the cost of energy is now close to the central scenario indicated in the June projections, but remains much higher than the levels before the escalation in the Middle East. Frankfurt therefore wants to understand how long the shock will last and, above all, whether the increase in oil and gas prices will end up transferring to transport, industrial goods, services and wages.
The decision to keep rates unchanged should therefore not be read as the beginning of a new phase of reduction in the cost of money. Rather, it is a pause for observation, useful for collecting new data before the September meeting.
Lagarde does not close the door to a rise in September
Lagarde reiterated that future decisions will be made on a meeting-by-meeting basis and on the basis of available data. The President did not rule out a new intervention at the next monetary policy meeting, scheduled for September 10th.
In fact, the market continues to consider a further rise possible by the end of the year. Much will depend on the trajectory of Brent, the price of European gas and upcoming data on underlying inflation.
If energy were to stabilize, the ECB would have more room to keep rates steady. If, however, oil and gas continue to rise and the increase spreads to other prices, Frankfurt could be forced to intervene again.
What changes for mortgages
For those with a variable rate mortgage, the ECB decision does not produce an immediate reduction in the installment. Rates remain at the same levels and the Euribor could also continue to move cautiously, waiting to understand what the central bank’s next move will be.
The absence of an increase, however, avoids a new direct increase in the cost of money. The pressure on installments will now depend above all on expectations for September: if the markets begin to bet more decisively on another tightening, interbank rates could rise even before the ECB meeting.
For new fixed-rate mortgages, however, medium and long-term bond yields will count above all. The return of inflation fears has already pushed up European bond yields, making a rapid decline in bank offers more difficult.
BTP under pressure if inflation risk returns
The ECB’s new prudence also directly affects the government bond market. When expectations of inflation and new rate increases increase, bond yields tend to rise and the prices of securities already in circulation may fall.
For those who buy new BTPs, higher yields mean potentially more interesting coupons and returns. For those who own securities and have to sell them before maturity, however, they can translate into fluctuations and possible capital losses.
The tension does not only concern Italy. The yield on the 10-year German Bund exceeded 3.2%, at levels not seen since 2011, while Brent oil approached the threshold of $100 a barrel.
What families and savers can expect
The ECB decision avoids a new immediate increase in installments and loans, but does not yet open a season of rate reductions. For families, businesses and savers, a waiting phase begins, in which any data on oil, gas and inflation could shift expectations towards the September meeting.
The bottom line is that the July pause does not represent a dovish turn. The ECB remains ready to intervene should the energy shock fuel more widespread pressure on prices.
For this reason, in the coming months mortgages, BTPs and the cost of credit will continue to depend not only on Frankfurt’s decisions, but also on what will happen to energy prices and geopolitical tensions.
