ECB signals policy hold as energy prices cloud the outlook

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ECB signals policy hold

Highlights

ECB is expected to keep its deposit rate at 2.25%.
Markets remain focused on a possible September rate hike.
Higher oil prices have renewed inflation concerns.
Lagarde is expected to emphasize a data-dependent approach.

Markets focus on September outlook

The ECB is expected to keep its deposit rate at 2.25%, pausing after June's quarter-point increase. According to Bloomberg, neither economists nor financial markets expect another rate hike this month, with attention instead shifting to whether policymakers signal a possible move in September. Traders continue to price in at least two additional rate hikes by early 2027, while most economists expect one final increase in September, followed by a roughly year-long pause in rates.

ECB President Christine Lagarde is expected to reiterate that future decisions will remain data-dependent, with updated inflation and economic forecasts playing a central role at the September meeting. Investors will closely watch her press conference for any indication that policymakers still see a "general sense" of policy direction despite elevated uncertainty.

Inflation Risks Return as Oil Prices Rise

The ECB's June meeting took place after a temporary ceasefire in the Middle East and softer-than-expected inflation data, encouraging hopes that price pressures were easing. Those expectations have weakened after renewed fighting pushed Brent crude back above $90 per barrel, raising concerns that higher energy costs could slow the decline in inflation.

Recent economic indicators remain relatively resilient. Inflation slowed to 2.8% in June, while services inflation and core price pressures also moderated. However, economists continue to monitor inflation expectations and potential second-round effects from higher wages and energy prices. Updated staff projections due in September are expected to provide a clearer picture of whether the ECB needs additional tightening.

Attention also turns to Lagarde

Christine Lagarde is also likely to face questions about speculation surrounding her future at the ECB. Reports have linked her to potential international roles, including leadership of the World Economic Forum, while comments about contributing to France's political debate have fueled speculation about an early departure before her term ends in October 2027.

For now, policymakers appear focused on balancing improving inflation trends against new geopolitical risks. Thursday's decision is expected to provide stability, but September could become the next major test for the ECB if energy prices remain elevated and inflation proves more persistent than anticipated.

What comes next

The ECB's decision will shape expectations for borrowing costs across the 20-member euro area, where inflation has eased but remains above the central bank's 2% target. Markets will look for guidance on whether rising energy prices are enough to delay the disinflation process.

With the deposit rate at 2.25%, investors see September as the next key policy meeting. Updated economic projections, inflation data, and developments in the Middle East are likely to determine whether the ECB delivers another increase or extends its pause.

We also reported that the ECB selects 36 participants for the digital euro pilot.

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