Euro Area Interest Rate

The ECB stands pat in July

Bank leaves rates unchanged, as expected: At its meeting on 22–23 July, the European Central Bank (ECB) decided to keep its deposit rate at 2.25%, after hiking it by 25 basis points for the first time since September 2023 in June. The decision was largely expected by market analysts.

U.S.-Iran uncertainty keeps ECB in check: The ECB opted for a cautious wait-and-see approach this time. Harmonized inflation declined from April to June, and economic uncertainty linked to the U.S.-Iran conflict has remained high. The ECB acknowledged that the full inflationary impact of the Iran energy price shock has yet to play out, hinting at possible hikes in the coming meetings.

Balance of risks points to a rate hike in Q3: The ECB reiterated it will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance ahead. That said, high energy prices due to the Hormuz Strait crisis are increasing the likelihood of another rate hike. Against this backdrop, the vast majority of our panelists expect the ECB to deliver another 25 basis points hike in Q3, before leaving rates unchanged in Q4. A small minority, however, expect the ECB to remain on hold through year-end, while others see an aggressive tightening path of 50 basis points by the end of this year. The Bank will reconvene on 9–10 September.

Panelist insight: Commenting on the outlook, Holger Schmieding, chief economist at Berenberg, stated: “If energy prices spike again, inflation could stay above 3%. This would reduce real household spending power and growth, and make the ECB consider hiking more than just once.” ING’s Carsten Brzeski said: “Unless oil prices start dropping significantly over the next weeks, the ECB’s own macro projections in September will call for another rate hike, loud and clear. Consequently, we are back in a situation in which the question is what could stop the ECB from hiking in September, rather than what would move the ECB to hike.”

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