The European Central Bank has left its interests rates unchanged after an increase last month raising the rate by 25 basis points to 2.65% for its marginal lending facility. In her press conference, ECB President Christine Lagarde said that current energy prices are at the levels of the ECB’s forecasts, and energy prices remain volatile.
The ECB Chief added that full impacts of the current energy shock are yet to play out in full, implying that inflation effects remains lagging.
Economic growth is being spurned by investment in technology, namely in AI and defence spending, but the labour market is weakening and remains weaker prior to the war in Iran.
The ECB Chief reiterated to European legislators to speed up the introduction of the banking and savings union to accelerate European growth on the back of forecasts that economic growth will remain “modest”. The ECB Chief also warned that fiscal responses to the energy shocks should be temporary, targeted and tailored.
The ECB Chief also welcomed the vote by the European Parliament approving the agreement with the Commission over the digital Euro.
On inflation, the ECB Chief said that despite inflation receding in May, the full effects of the energy shock are to play out as sellers raise their prices due to increased prices of their inputs caused by higher energy prices. She added that risks to growth remained to the downside and referred to the fragile peace between the US and Iran signed at the Versailles Palace. The effects of the energy shock can also be more severe than expected.
Extreme weather events may also keep pushing food prices higher.
Growth could be higher either if the conflict in the Middle East is resolved sustainably or if markets adopt to the energy shocks via technology.
Mortgage rates in the Euro area rose from 3.4% to 3.5% in line with the interest rates increases last month and financial conditions are tighter.
You can watch the press conference in full here. Press release here.
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