ECB Leaves Rates on Hold as Expected

The European Central Bank left its key interest rates unchanged at its July meeting, following a 25bp increase in June, the first rate hike in three years, driven by rising energy prices and persistent inflationary pressures. Since then, policymakers have struck a more cautious tone, adopting a "wait-and-see" approach as softer inflation, wage growth, economic activity, and inflation expectations have reduced the urgency for another move. The ECB said the outlook for energy prices remains broadly in line with its June projections despite continued volatility, while warning that uncertainty remains high and the full inflationary impact of the energy shock has yet to emerge. Policymakers also noted they will continue to monitor its broader effects on inflation and the economy. At the post-meeting press conference, ECB President Lagarde warned that the longer energy prices remain elevated, "the more likely they are to drive up broader inflation through indirect and second-round effects."

The European Central Bank is widely expected to keep interest rates unchanged on Thursday, following June's first increase in three years, which was largely prompted by higher energy prices. With no updated economic projections, the focus will be on President Christine Lagarde's press conference for clues about the next policy moves. Officials are expected to strike a cautious but firm tone, reinforcing market pricing for one or two additional increases by year-end. The renewed surge in oil prices has again strengthened expectations of further tightening, much as it did at the onset of the Iran conflict. A September move is now almost fully priced in, and unless energy prices ease materially, that view is unlikely to change. Beyond then, the ECB's messaging will be key to shaping expectations for the pace and extent of any further policy tightening.

ECB policymakers agreed to avoid providing guidance on the future path of interest rates following June's first rate hike since 2023, citing elevated economic uncertainty, according to the latest meeting minutes. Officials stressed that communication should remain neutral, neither signaling a series of further hikes nor suggesting the move was a one-off. The Governing Council reaffirmed its data-dependent, meeting-by-meeting approach and commitment to returning inflation to its 2% target, while warning that persistently high energy prices could fuel broader inflation. Policymakers said they would closely monitor inflation, wages, demand, financial conditions, and market developments. Markets now see a 70% chance of a September rate hike, as the latest oil price surge following renewed US-Iran strikes has outweighed the relatively dovish tone struck by ECB officials at the early-July Sintra forum, where they had signaled less urgency for additional tightening.