ECB keeps rates stable, markets await signals on September policy path

Although the latest 25-basis-point interest rate hike on 11 June was accompanied by the message that it did not mark the beginning of a new monetary tightening cycle, geopolitical developments in the Middle East have reintroduced uncertainty over the inflation outlook and, consequently, the European Central Bank’s decisions from September onwards.

Energy returns to the spotlight

The temporary easing of tensions following the US–Iran ceasefire agreement had led to a significant decline in oil prices. Brent crude had fallen back to around $72 per barrel, reinforcing expectations that inflationary pressures would continue to ease towards the 2% target.

However, renewed tensions in the region, including attacks in the Strait of Hormuz and the subsequent military operations, reversed those expectations. Brent prices moved higher again, reaching approximately $85 per barrel, raising concerns over a new wave of energy-driven price increases.

This development is causing significant concern in Frankfurt, as higher energy costs could feed through into the prices of goods and services, slowing the decline of inflation in the euro area.

Data to determine the ECB’s next moves

The ECB continues to emphasise that its decisions will be based solely on the economic data available at each policy meeting.

The upcoming Eurostat inflation releases for July and August, as well as preliminary data on euro area GDP performance in the second quarter of the year, are now considered particularly important.

These indicators will form the basis for the decisions to be taken at the 10 September meeting, when the ECB Governing Council will reassess the economic and inflation outlook.

At the same time, developments in international energy markets are gaining increased importance, as the duration and intensity of the geopolitical crisis will directly affect inflation forecasts.

Warnings from the IMF and Bundesbank

Additional concerns have been raised by the International Monetary Fund’s assessment that some of the factors that have so far helped contain global oil prices are losing effectiveness, including the use of strategic reserves, increased production outside the Persian Gulf, and weaker demand from China.

Similarly, Bundesbank President Joachim Nagel stated that, while he considers the current level of interest rates satisfactory, recent developments in the Middle East have significantly increased uncertainty.

He stressed that energy price developments remain a key factor in the inflation outlook, noting that the ECB will continue to closely monitor economic data and remain prepared to act if conditions require it.

Markets turn their attention to Lagarde

With the decision to maintain interest rates largely anticipated by markets, investors’ focus is shifting to the press conference of ECB President Christine Lagarde.

Her remarks are expected to provide indications as to whether the recent increase in oil prices has altered the ECB’s assessment of the inflation trajectory or whether the central bank continues to believe that inflationary pressures remain under control.

Until a clearer picture emerges from economic data and developments in the Middle East, Frankfurt is expected to maintain a wait-and-see approach, keeping all options open for its autumn policy decisions.