LONDON, July 23 (Reuters) – The European Central Bank kept borrowing costs on hold on Thursday but left room for more tightening in the coming months as a widening conflict in the Middle East pushed up energy prices again.
The ECB kept its deposit rate at 2.25% but said it was “closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects.”
The euro extended its falls and was last down 0.2% at $1.1388.
Interest-rate sensitive two-year bond yields across the euro area held higher on the day, with German two-year bond yields last up around 2 basis points at 2.86%.
Money markets price in a high chance of two more rate increases by year-end.
COMMENTS:
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:
“After raising interest rates in June, as expected, the ECB is on hold today. The Governing Council’s focus remains on inflationary pressures, with the latest events in Middle East set to push up the ECB’s expectations of where inflation is heading later this year. And although no pre-commitment to future policy path is provided, the ECB will clearly have a bias toward tighter policy.”
MADISON FALLER, GLOBAL INVESTMENT STRATEGIST, JP MORGAN PRIVATE BANK, LONDON:
“Preserving optionality should not be confused with complacency. As one of the first movers earlier this year to hike amid inflation pressures, today’s meeting reinforces the same instinct: to stay in front of the risk, not behind it.”
“That keeps September as a live meeting, with the bar to hold edging higher. Policymakers would likely need to see energy prices roll over quickly and little sign of spillover into the broader economy, conditions that look increasingly difficult to meet with energy and inflation pressures clearly back in focus.”
CONOR PARLE, EURO ZONE ECONOMIST, FIDELITY INTERNATIONAL, LONDON:
“The ECB left interest rates unchanged at their meeting today, but against the backdrop of higher commodity prices and the latest increased tensions in the Middle East, this pause is likely to be temporary.”
“Beyond oil prices, gas prices had been increasing even before the recent heightened tensions. Higher demand to refill low supplies ahead of winter, alongside China increasing imports, are likely supporting further price pressures in the gas market.”
“Meanwhile, reasonable resilience in the euro area economy means that, once the ECB updates its September forecasts, it will likely be in a comfortable position to increase rates by a further 25 basis points to the upper end of its neutral range, while sending a clear message about its commitment to price stability.”
ED HUTCHINGS, HEAD OF DEVELOPED MARKET RATES AT AVIVA INVESTORS, LONDON:
“Overall, the immediate priority for the ECB is clear: addressing the inflationary backdrop, and as such the market is right in thinking more hikes will be coming down the line, but with one hike already being delivered and more than two further hikes priced, have things gone too far? It’s certainly beginning to look that way.”
(Reporting by the Reuters Markets Team, compiled by Dhara Ranasinghe, editing by xxx)
