The European Central Bank is predicted to depart charges unchanged at its assembly concluding at the moment, selecting persistence over prediction and preserving most room for manoeuvre forward of a huge determination by September.
Neither merchants nor analysts imagine the ECB will ship a second consecutive hike at the moment after final month’s increase. That means the deposit fee is seen remaining at 2.25%, a degree officers have described as being “applicable” as they consider implications of a re-escalation in the US-Iran battle.
In an economists’ panel for Bloomberg I sat on, most economists left open the possibility of a second quarter-point rise in charges by September, when policymakers could have new quarterly projections.
A ceasefire following the June ECB assembly together with weaker-than-anticipated inflation that month had bolstered hopes that the worst of the disaster might have handed. However – recent hostilities not too long ago, putting Brent oil back round USD 100 a barrel, have revived expectations for more tightening forward.
Traders presently wager that an initial June transfer might be adopted up by one other in September and a last one by the tip of this 12 months. The ECB’s projections final month have been primarily based on assumptions for a whole of three hikes this cycle.
Nevertheless, the message from Frankfurt at the moment is unlikely to be a roadmap for the subsequent transfer. Rather, it’s prone to be a reminder that financial coverage stays extremely depending on developments which might be unforeseeable. The ECB doesn’t need to inform markets the place it’s heading when the vacation spot nonetheless hinges closely on an unsure path of power costs, exchange charges and geopolitical tensions.
At this stage, the Governing Council’s best asset is its flexibility – and it’s unlikely to give up that asset by prematurely signalling whether or not September might carry one other fee increase or a extended pause.
Inflation Risks Had Recently Moderated
The ECB has already moved in response to the inflation shock of the latest months, and policymakers are prone to stay barely cautious as issues tightening additional except the info clearly demand it. The central bank’s problem isn’t merely if inflation is elevated (Figure 1), however whether or not current pressures will show persistent enough to forestall inflation from regularly returning nearer to its 2% goal. Headline inflation slowed more than anticipated final month to 2.8% 12 months on 12 months.
Figure 1. Euro space inflation eased more than anticipated final month
Euro space headline and core harmonised index of shopper costs, annual charges of change, %
Source: Eurostat.
The ECB is seen emphasising that it stands able to act additional whereas recognising that the broader inflation trend stays per disinflation in the longer run.
Energy Prices Hold the Key in September
The inflation outlook has turn out to be a story of situations reasonably than certainty. Based on the 4 energy-price situations outlined by the ECB in June, the euro space stays presently nearest to the ECB’s baseline state of affairs.
The sharp decline in oil costs following an interim US-Iran peace settlement had shifted the stability of dangers back in direction of near-term disinflation. Compared with the assumptions behind the ECB’s June projections, the autumn in power prices represented a significant draw back risk (Figure 2).
Figure 2. Risks to euro space inflation on the draw back this 12 months
Note: Percentages might not add up to 100 resulting from rounding. Source: Bloomberg survey of skilled economists carried out 10-15 July 2026.
Nonetheless, the power shock has not disappeared; it has merely turn out to be more conditional. Fresh geopolitical uncertainty has positioned upside dangers back on the inflation outlook and ensured that a September fee increase stays a real risk.
The euro provides additional complexity. A weaker currency (Figure 3) modestly worsens the inflation outlook by making imported items, power and commodities more costly when priced in euro phrases. Although the exchange-rate channel is unlikely to be the dominant driver of ECB coverage, any sustained euro weak point might complicate central bank efforts at bringing inflation back to focus on.
Figure 3. The euro has weakened
Daily nominal efficient exchange fee of the euro, index degree
As of 22 July 2026. Source: ECB.
The decisive query at the moment is how long-lasting renewed US-Iran tensions might show to be.
If the latest escalation reverses and power costs reasonable, inflation dangers could also be tilted to the draw back in contrast with ECB June forecasting. Under that state of affairs, the ECB could possibly maintain charges unchanged for the rest of this 12 months.
But if a fragile ceasefire fails to return and power costs keep elevated or additional rise, the scenario modifications. A sustained oil shock, compounded additional by a weaker euro, would raise the risk of second-round inflationary results – particularly if companies and households additional regulate expectations for future costs. Modest additional indicators that inflation expectations may turn out to be much less firmly anchored could be enough to persuade the ECB to behave.
Why Washington Matters for Frankfurt
So, the ECB’s September determination hinges as a lot on geopolitics as on the financial information. Here, the US administration itself faces significant strain to forestall additional escalation with Iran, not solely as a result of of the geopolitical penalties but additionally as a result of of the financial fallout from one other power shock.
The renewed rise in power costs provides strain on the Federal Reserve to reply with tighter financial coverage. That dynamic creates an incentive for Washington forward of elections to keep tensions contained. A chronic confrontation would risk transmitting greater power prices into each US and European inflation – forcing central banks into a more troublesome coverage trade-off.
For the ECB, the forthcoming months might be outlined by uncertainty management reasonably than by a predetermined path. The central bank is unlikely to commit itself at the moment as a result of the financial vacation spot is unclear. Its most well-liked strategy must be to protect optionality and permit incoming info to form its choices.
The Question of Lagarde’s Exit
An extra query looming over the ECB at the moment is that if its President, Christine Lagarde, might depart from her post earlier than a formal expiry subsequent October. Such a step would afford French President Emmanuel Macron a say in appointing her successor forward of French presidential elections subsequent spring. More not too long ago, Lagarde introduced plans of involving herself in France’s marketing campaign, to raise European pursuits “in whichever capacity I will be most efficient,” whereas saying she wouldn’t herself search workplace.
Dennis Y. Shen is a macroeconomist and the previous Chair of the Macroeconomic Council of the European credit ranking company. He is a lecturer on the International School of Management (Germany) and serves as a Member of the Supervisory Board of Visioneers gGmbH. He is a common contributor for the London School of Economics.
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