ECB expected to hold rates Thursday as oil rally locks in September hike bets

The European Central Bank is widely expected to keep its benchmark deposit rate unchanged at 2.25% when it meets on Thursday, July 23, even as a renewed surge in oil prices driven by escalating U.S.-Iran tensions has locked in market expectations for another rate increase in September.

Markets Price In September Move

Swap markets are pricing in no rate change at this week's meeting, with more than 90% of economists predicting rates will be held flat, according to Morningstar ↗ 0.82%. However, the outlook beyond July has shifted decisively hawkish. Interest rate markets now imply an 85% probability of a 25-basis-point hike in September, which would take the deposit rate to 2.50%. Money markets are pricing in an ECB deposit rate of 2.70% by December, implying one to two additional hikes for the remainder of the year.global.morningstar+1

Germany's two-year bond yield, highly sensitive to rate expectations, rose to 2.78% on July 20, its highest level since May 2024, after climbing steadily through the month. The move reflects growing conviction that energy-driven inflation will force further monetary tightening from the ECB, which raised rates by 25 basis points to 2.25% in June — its first hike since 2023.sahmcapital+3

Oil Prices and the Inflation Outlook

The catalyst for shifting rate expectations has been crude oil's rally. Brent crude futures surged to around $88 per barrel by Monday, up roughly 14% from early July levels, after U.S.-Iran hostilities intensified. The United States revoked a 60-day sanctions waiver on Iranian oil exports, reimposed its naval blockade of Iranian ports, and launched fresh strikes, while Iran attacked oil tankers in the Strait of Hormuz.aljazeera+2

Yet a fresh ECB survey released Monday offered some counterbalance to inflation fears. More than 5,000 eurozone firms now expect selling prices to rise by 3.2% over the next year, down from 3.5% three months earlier, and wage growth expectations also moderated, suggesting limited second-round effects from the energy shock so far.wtvbam+1

Eurostat Euronext N.V. confirmed that annual eurozone inflation eased to 2.8% in June from 3.2% in May, driven by falling energy costs and slower services inflation. The ECB's June staff projections see headline inflation averaging 3.0% in 2026 before declining to 2.3% in 2027.eunews+2

Lagarde's Balancing Act

ECB President Christine Lagarde is expected to acknowledge elevated inflation risks at Thursday's press conference without pre-committing to a September move. At the April meeting, the ECB flagged "heightened apprehensions regarding escalating inflation" while keeping rates on hold. ECB Governing Council member Pierre Wunsch said in June that he would support another hike "if we continue to see this trend" in non-energy inflation, but would accept a delay to September if incoming data remained "inconclusive".reuters+1

The tension between energy-driven price pressures and signs of moderating underlying inflation will define the ECB's policy path through autumn.