Following the increase of the deposit rate to 2.25% in June, the European Central Bank (ECB) chose to keep its three key interest rates unchanged at this monetary policy meeting. Despite the pause in rate hikes, policymakers did not signal any easing, leaving room for potential further tightening. Market attention has now shifted to policy directions in September and beyond, particularly regarding the potential impact of geopolitical situations on inflation expectations.
Recent economic data from the Eurozone has been decent, with inflation falling from 3.2% in May to 2.8% in June, and wage growth remaining relatively moderate. This has somewhat reduced the urgency for consecutive rate hikes. However, escalating geopolitical conflicts in the Middle East have rapidly altered economic outlooks. International oil prices surged again, briefly breaking the $100 per barrel mark. Threats to shipping in the Strait of Hormuz and the Red Sea have reignited tensions in the global energy supply chain. The ECB statement explicitly pointed out that uncertainty remains high, and the full impact of energy shocks on inflation has not yet fully materialized.
Market analysts view this decision as a hawkish pause, believing current data still supports further policy tightening. Financial markets have reacted accordingly, with traders generally expecting the central bank to complete remaining rate hikes by February next year at the latest. There is a high probability of resuming hikes in September or October, with a cumulative increase of approximately 50 basis points expected before the first quarter next year. The primary reason policymakers are able to adopt a wait-and-see stance for now is that the second-round effects of rising energy costs passing through to broader goods and services are not yet clearly visible in the data, and the risk of a wage-price spiral has not yet become a reality.
Nevertheless, the central bank remains highly vigilant, closely monitoring the intensity and duration of shocks and their indirect effects. Additionally, extreme heat and El Niño phenomena could damage crops, while low water levels in key waterways like the Rhine could create shipping bottlenecks. These factors could drive up future food prices. Although food inflation has generally declined recently, abnormal climate conditions constitute new upside pressure.
At the subsequent press conference, the ECB President stated that internal discussions on further rate hikes have begun, but decisions will remain data-dependent and made on a meeting-by-meeting basis, with no pre-commitment to specific rate paths. Addressing speculation about his personal tenure, the President clarified he would not leave office this year, though personnel uncertainty adds a sensitive dimension to policy communication. As the risk of second-round effects from the oil price shock accumulates, market focus is locked on September. Whether rate hikes resume will depend on oil price trends and their transmission to broader inflation.
