The European Central Bank is vigilantly monitoring global energy costs following the renewed outbreak of conflict in the Middle East, which has heightened geopolitical uncertainty. This view was expressed by Joachim Nagel, a member of the ECB's Governing Council and President of Germany's Bundesbank.
Aside from Nagel, recent commentary from other Governing Council members has largely converged on the expectation that the ECB is more likely to hold interest rates steady at its July meeting, though there is no unanimous agreement that the rate-hiking cycle has definitively ended.
In a statement distributed via email, the German central bank chief described the past few weeks as "a time of both hope and disappointment." He added that the resumption of hostilities between the US and Iran underscores the ongoing volatility of the situation. "The trajectory of energy prices is a key determinant for the future inflation outlook," Nagel stated. "Monetary policy will continue to maintain a vigilant stance."
These remarks were made just ahead of the pre-meeting quiet period for the ECB's July 22-23 policy gathering. Economists widely anticipate that the Governing Council will unanimously vote to keep interest rates unchanged at that session.
Investors, however, still expect policymakers to implement another rate hike later this year to counter inflationary pressures stemming from the Iran conflict. In recent separate newspaper interviews, Austrian National Bank Governor Martin Koehler and ECB Executive Board member Piero Cipollone both noted they have not yet observed second-round inflation effects, such as significant wage increases, that could entrench price pressures.
Koehler reiterated that upcoming decisions would focus on either maintaining or further raising borrowing costs. Nagel emphasized that following the June decision, current borrowing costs are clearly at an "appropriate" level, and the Governing Council will continue to incorporate all relevant data into its policy considerations in forthcoming meetings.
"From a monetary policy perspective, it remains prudent to react cautiously, but it is also necessary to act decisively when required," he said.
The ECB raised rates by 25 basis points in June and projects headline inflation at 3.0% for 2026 and 2.3% for 2027, notably above its 2% medium-term target. Markets have largely priced in a pause in July and a hike in September, with bets on potentially two more rate increases by next spring.
This suggests the ECB is not re-entering a continuous tightening mode but is instead waiting to see if the energy price shock transmits into wages, service prices, and inflation expectations. Within the more hawkish camp, Belgian National Bank Governor Pierre Wunsch has been the most explicit, stating he retains the possibility of a hike as early as July, even if a US-Iran ceasefire temporarily lowers oil prices. He believes the ECB could implement one more hike for "insurance" if inflation spreads from energy to broader price categories.
Greek central bank chief Yannis Stournaras, citing the renewed conflict, described the inflation situation as "back to square one," shifting his stance from flexible observation to a more neutral-to-hawkish position. Austrian National Bank Governor Martin Koehler stated that while second-round effects like rising wages or inflation expectations are not yet visible, future options are clearly either maintaining or raising rates, with readiness to act if necessary.
Overall, the current dynamic within the ECB's Governing Council is not a case of "hawks overwhelming doves." Instead, a conditional consensus has formed: to first pause, then decide on any further rate hikes based on the persistence of oil price trends and the emergence of second-round effects.
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