Economists widely anticipate that the European Central Bank will pause its interest rate hikes next week to assess the inflation landscape, with a likely final increase to follow in September. A survey indicates unanimous expectations that the ECB will leave borrowing costs unchanged this coming Thursday. Most respondents forecast that policymakers will raise the deposit rate by 25 basis points to 2.5% in September, after receiving the latest quarterly economic projections. This level is broadly seen by economists as the terminal point for the ECB's current tightening cycle, which was initiated following the oil price surge triggered by the conflict in Iran and the subsequent severe inflationary shock for the eurozone since 2023.
However, aligning with signals from the ECB itself, analysts express considerable uncertainty. The rapidly evolving situation in the Middle East, which has shifted from a fragile ceasefire back towards renewed hostilities over the past month, is a key factor. "The crucial question is whether the tensions between the U.S. and Iran are merely temporary," stated Dennis Shen, a lecturer at the International School of Management at Berlin University of Technology. A contained situation "would argue for keeping rates steady," whereas a more severe conflict "could trigger second-round effects and put pressure on inflation expectations."
Considering the policy trajectories of other central banks, a September rate hike could further cement the ECB's position as the most hawkish within the Group of Seven (G7). Last month, it became the first G7 central bank to raise rates following the outbreak of the Iran conflict. Next Thursday's policy meeting is expected to set the tone for financial market positioning ahead of the long summer recess.
Given this context, Kristian Toedtmann, an economist at DZ Bank, believes the focus of this week's meeting will be on signaling policy intent. "The supply shock is gradually working its way through the economy," he said. "The ECB will signal that it is monitoring the situation very closely, that its current stance is robust, and that it is prepared to act if necessary."
Officials, including Austrian Central Bank Governor Robert Holzmann and ECB Executive Board member Piero Cipollone, indicated this week that there is currently no evidence wage dynamics are further entrenching price pressures. June inflation data and a closely watched services sector indicator both showed price increases slowing more than expected.
Nevertheless, Bundesbank President Joachim Nagel has insisted the ECB will maintain a "vigilant stance." He stated on Wednesday that current borrowing costs are at an "appropriate" level, adding that the Governing Council would continue to take all relevant data into account at future meetings.
For economists, the key variable determining a potential autumn rate hike remains the trajectory of the Iran conflict and its knock-on effects on oil and gas flows. "The slowdown in eurozone inflation in June has removed the need for urgent action. However, high commodity prices still leave the Governing Council leaning toward another hike in September—when policymakers will have the latest projections from the in-house economists—which could be the last hike in this short tightening cycle," noted economists David Powell and Simona Delle Chiaie.
"We do not see a September hike as a done deal," said Chris Hare, an economist at HSBC. "If progress is made on the peace process and energy supply improvements get back on track, we think the ECB could ultimately avoid a hike."
Approximately 41% of survey respondents expect the ECB to provide at least some signals about the likely path of interest rates in the coming months next week, despite President Christine Lagarde's recent reiteration that the bank aims to avoid forward guidance.
Economists see downside risks to the ECB's June baseline forecasts for growth and inflation this year and next, but view the medium-term outlook as broadly balanced. Only 9% of respondents see evidence that inflation expectations have become de-anchored, with most not overly concerned about second-round effects.
This outlook brings the prospect of a future policy pivot towards rate cuts into view. The survey's median expectation points to a first rate cut in September 2027, while four respondents predicted cuts could begin as early as March next year.
Comments