ECB Expected to Stand Pat After June Hike

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.

The European Central Bank raised interest rates by 25 basis points at its June 2026 meeting, the first increase since 2023, as policymakers emphasized their commitment to anchoring inflation at the 2% medium-term target. The move follows rising energy costs and persistent inflation risks driven by the Iran conflict and disruptions to oil shipments through the Strait of Hormuz. The ECB stated that the Middle East war is amplifying inflationary pressures, and the rate increase is supported across scenarios assessing its impact on the euro area’s outlook. The ECB also revised its inflation forecasts upward, now expecting headline inflation to reach 3.0% in 2026 (up from 2.6%) and 2.3% in 2027 (up from 2.0%). Core inflation was also raised to 2.5% for both 2026 and 2027, from previous estimates of 2.3% and 2.2%, respectively. For economic growth, the ECB slightly lowered its Eurozone GDP projections, forecasting expansion of 0.8% in 2026 (down from 0.9%) and 1.2% in 2027 (down from 1.3%).