The European Central Bank decided to keep its deposit rate unchanged at 2.25% on Thursday, with President Christine Lagarde paving the way for a potential rate hike in September.
During the press conference in Frankfurt, Lagarde revealed that some Governing Council members raised the question of whether immediate action was needed. However, the committee unanimously agreed to hold rates steady and monitor incoming data closely over the coming weeks.
"Some members considered whether we should raise rates," Lagarde told reporters in Frankfurt. "We are in a position that is fully appropriate to wait and to monitor developments and incoming data with high intensity in the coming weeks."
While the ECB maintains its standard "meeting-by-meeting" approach to monetary policy, these remarks represent the clearest signal yet that policymakers are leaning toward further tightening, especially against the backdrop of escalating Middle East tensions.
This stance keeps the ECB ahead of other Group of Seven central banks. Last month, it became the first G7 central bank to raise interest rates since the start of the Iran conflict.
The September meeting is widely seen as the natural timing for any necessary rate increase. It will be supported by fresh ECB staff quarterly forecasts, two months of inflation data, and additional economic indicators including corporate surveys.
Following the rate decision and Lagarde's comments, bond prices showed little change. The 10-year German Bund yield rose two basis points to 3.19%, after earlier touching 3.21% — its highest level since 2011 — driven by rising oil and gas prices that intensified inflation concerns.
Market bets on the next rate move remained stable. Swap markets now price in a near-certain 25 basis point rate hike in September, and also fully price in another increase by year-end. The euro continued its decline, falling 0.3% against the U.S. dollar to around $1.1374.
On the day of Lagarde's speech, the expanding conflict pushed Brent crude oil above $100 per barrel for the first time in two months. This followed claims by Iran-backed Houthi rebels that they had attacked two Saudi oil tankers in the Red Sea.
"Inflation prospects face upside risks," Lagarde said. "Energy shocks could intensify further, and their impact on other prices and wages could be stronger than currently expected. The longer energy prices remain elevated, the greater the likelihood of a broader rise in inflation."
Lagarde noted that underlying price increases remain "contained" for now. Eurozone headline inflation slowed to 2.8% in June, below expectations.
However, the resumption of U.S.-Iran hostilities this month has prompted policymakers to acknowledge that their work may not be complete. When fighting resumed in early July, Yannis Stournaras, the Greek central bank governor and one of the most dovish ECB Governing Council members, admitted "we are back to square one."
"The full impact of the energy shock has not yet been felt," Lagarde said. "Although energy price inflation fell in June, the rise in energy prices since the start of the conflict, together with its impact on food, goods, and services price inflation, is likely to keep inflation well above target until the first half of 2027."
The ECB's June staff baseline forecast predicted inflation would average 3% this year, before easing to 2.3% and 2% in 2027 and 2028 respectively. However, core inflation, which excludes energy and food, is expected to remain above the ECB's 2% target through 2028.
The ECB will now enter a seven-week hiatus before its next policy decision meeting. Lagarde indicated that during this period, the bank's economists would be extremely busy, with work extending beyond just preparing forecasts.
"We have asked staff to conduct some really in-depth analysis for the September meeting," she added. "Looking at energy prices, oil has certainly risen and is continuing to rise even as we speak, but gas prices have also increased significantly, and given that inventories are at fairly low levels, this is also an issue that will be closely monitored."
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