ECB holds rates at 2.25% as energy shock from Middle East conflict clouds inflation outlook

## Decision The European Central Bank left its three key interest rates unchanged at its 23 July meeting, keeping the deposit rate at 2.25%, the main refinancing rate at 2.40% and the marginal lending rate at 2.65%. The decision was unanimous, but President Christine Lagarde disclosed that some Governing Council members had openly discussed whether a rate increase would be warranted.

Some members of the Governing Council wondered aloud whether we should consider a rate hike at this meeting. We analysed the data, recent developments, and all unanimously assessed that we are in a good position to wait and pay particular attention to developments in the coming weeks and incoming data.

The ECB stressed it remains data-dependent and does not pre-commit to any rate path. The next policy meeting is scheduled for 9–10 September, when new staff projections will be available.

Inflation picture

Eurozone inflation eased in June, with the harmonised index of consumer prices (HICP) falling to 2.8% year-on-year from 3.2% in May. Core inflation, which strips out energy and food, slowed to 2.4% from 2.6%. Energy price growth decelerated to 8.5% from 10.8%, while food inflation dropped to 1.5% from 1.9%. On a seasonally adjusted annualised basis, core momentum fell to 2.1% in June from 2.6% in March, suggesting that economic weakness is outweighing fuel-driven price pressures.

Lagarde noted that rising labour productivity has helped contain unit labour costs, and wage indicators point to moderate pay growth in coming quarters. Short-term inflation expectations remain elevated, but most long-term measures are anchored around 2%.

Energy shock and oil

Despite the improving inflation data, the ECB warned that the full effects of the energy shock triggered by the Middle East conflict have not yet materialised. Oil prices have surged back above $90 per barrel and are testing $100 after the Strait of Hormuz was again closed to free navigation following renewed hostilities between the United States and Iran. The ECB's statement said energy price prospects, though volatile, are close to the baseline of the June projections and significantly higher than levels recorded before the conflict.

The energy shock is still contributing to price increases. Companies face rising raw material costs and expect to raise selling prices. Although core inflation remains moderate, the full effects of the energy shock have not yet fully emerged.

Lagarde added that inflation is likely to remain well above the 2% target until the first half of 2027, after which it should decline as energy prices are expected to fall and other price growth slows. The conflict, she said, remains the main source of uncertainty.

What comes next

Analysts are divided on the ECB's next move. Economists at PKO BP said the outcome leaves room for another rate hike in September, arguing that such a move would fit the ECB's tradition of premature tightening that worsens the economic situation. By contrast, Jack Allen-Reynolds of Capital Economics said that if energy prices fall in the coming months, the ECB will likely keep rates on hold for the rest of the year. Markets are currently pricing nearly two full 25-basis-point hikes over the remainder of 2026.

If energy prices fall in the coming months, in line with our assumptions, the ECB will most likely leave interest rates unchanged for the rest of the year. However, if energy prices continue to rise, there is a good chance the bank will raise them again.

Ripple effects for Poland

Although Poland is not a eurozone member, the ECB's decision has direct consequences. Stable eurozone rates remove additional pressure on the zloty-euro exchange rate, aiding predictability for exporters and importers. The National Bank of Poland monitors the rate differential, as any change could affect capital flows. Moreover, unchanged ECB rates mean that the cost of servicing euro-denominated debt, including under the SAFE programme, will not rise immediately.