The European Central Bank is widely expected to leave interest rates unchanged today. It raised rates last month for the first time since 2023. Today’s meeting also comes without a new set of staff economic forecasts. So raising rates again without any new information would be difficult to justify, especially after policymakers presented June’s decision as a carefully considered move rather than a reaction to short-term developments.
June’s inflation data strengthened the case for waiting. Consumer prices across the euro area rose 2.8% on the year, down from 3.2% in May, while the underlying measure that excludes food and energy eased to 2.4%. Both figures undershot expectations, giving the more cautious members of the Governing Council grounds to argue for patience.
That does not settle the debate. Inflation still exceeds the ECB’s own policy rate, which is not the case in the United States or Britain, and the ECB operates under a single mandate to return inflation to 2%. It therefore has less latitude than its peers to disregard an energy shock.
Energy remains the central uncertainty. Commodity prices have moved sharply since the last meeting, easing when a deal with Iran appeared close and recovering once hostilities resumed. Gas is trading well above the level assumed in the more benign of the ECB’s June scenarios. That is why the hawks remain vocal. Isabel Schnabel (ECB board member) has stated that further tightening should be expected, and Christine Lagarde, at the ECB’s annual conference in Portugal last month, described the appropriate response as “measured”, widely read as signalling one further increase and no more.
Overall, the likely outcome for today’s meeting is a hold delivered with a hawkish tone. Two things merit attention: whether the statement continues to describe inflation risks as tilted to the upside, and whether Lagarde endorses market pricing for a September move. September is the more consequential meeting, since updated projections will be published then. There is a scenario where they may not support the hawkish case. Growth was flat in the first quarter, survey indicators have weakened, and wage growth of roughly 2.8% falls well short of the numbers seen in 2022. Absent a sustained escalation in the Middle East, June may prove to have been the last increase in the current rates cycle.
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