ECB rate outlook stays in focus as oil rebound tests inflation path

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ECB rate outlook and oil

Highlights

Swap markets fully price in a second ECB rate increase by October, with less than 15 per cent probability of action in July amid revived oil-driven inflation concerns.
UK inflation expected to slow to 2.7 per cent in June, but oil’s rise to $85 a barrel prompts markets to price in a 25 basis point BoE hike by November from 3.75 per cent.
US S&P Global surveys forecast manufacturing and services above 50, while traders now expect just one Fed rate hike by end-2026 after softer inflation data.

Central bank signals and policy timing

As reported by Financial Times, economists and investors are betting that the ECB postpones another rate increase until September, even after the recent rebound in oil prices revives concern about inflation risks. Swap markets have fully priced in a second increase by October, but imply a probability of less than 15 per cent that the ECB acts in July.

BNP Paribas economists say renewed Middle East tensions reinforce their view that the ECB hiking cycle is not over. They still see a July pause followed by a September increase as the most likely outcome, arguing that policymakers are likely to wait for updated economic projections, two more inflation readings and possibly more clarity on the trajectory of the U.S.-Iran conflict.

DZ Bank economist Christian Reicherter also expects no move at the coming meeting and says ECB president Christine Lagarde is likely to strike a moderately hawkish tone. In his view, policymakers keep open the option of a further rate rise because upside risks to inflation persist.

UK and U.S. data add to rate debate

In the UK, the first week of Prime Minister Andy Burnham’s term brings a run of official data that could shape expectations for the Bank of England. Economists surveyed by Reuters expect unemployment to edge up to 5 per cent in the three months to May, while June consumer price inflation is seen slowing slightly to 2.7 per cent from 2.8 per cent in May.

That softer inflation outlook is partly linked to lower petrol prices after the U.S.-Iran ceasefire, but the renewed rise in oil to $85 a barrel is raising questions about whether energy costs could push rate-setters into a more hawkish stance. Traders assign only a slim chance to a move at the July BoE meeting, though markets are pricing in a quarter-point increase by November from the current 3.75 per cent base rate.

Morgan Stanley analysts say a meaningful hawkish pivot in July is difficult to see unless oil prices rise sustainably towards $100 a barrel before the meeting. UK retail sales data due on Friday are also expected to offer investors a fresh view of consumer demand.

In the U.S., investors are watching Friday’s S&P Global purchasing managers’ surveys for signs of economic resilience. Economists surveyed by Reuters expect manufacturing to rise to 54 and services to 51.5, both above the 50 threshold that separates contraction from expansion.

Jason Pride, chief of investment strategy and research at Glenmede, says growth remains strong on a fundamental basis, supported by stronger new orders, production and AI-related infrastructure investment. He also says businesses are benefiting from refunds tied to the Trump administration’s corporate tax cuts in the One Big Beautiful Bill Act, a factor he sees lifting GDP growth this year.

Further evidence of U.S. economic strength could strengthen the case for Federal Reserve rate rises later in the year. Even so, traders trimmed bets on higher borrowing costs after weaker than expected inflation data, and futures markets now price in one quarter-point Fed increase by the end of 2026.

Our earlier article on inflation hedges amid rising oil prices explained that softer June U.S. CPI data reduced immediate pressure for more Fed tightening, but the rebound in crude tied to renewed Iran-related hostilities kept inflation risks elevated. We also outlined how investors were looking to tools such as TIPS, dividend-paying stocks, REITs and commodities to protect portfolios if energy costs feed back into broader prices and prolong the higher-rate outlook.

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