ECB holds rates steady, signals September hike likely

The European Central Bank kept its deposit facility rate unchanged at 2.25% on Thursday, pausing after its June rate increase to assess the economic fallout from renewed Middle East hostilities and rising energy prices. The decision, widely anticipated by economists and markets alike, leaves the ECB as the only major central bank actively in tightening mode in 2026.

A Pause, Not an End

The hold comes six weeks after the ECB raised rates by 25 basis points in June — its first hike since 2023 — in response to an Iran conflict-driven surge in oil prices that pushed euro area inflation back above the bank's 2% target. All 74 economists in a Reuters poll conducted July 13–16 had expected the ECB to stand pat this month.European Central Bank+2

Yet the door to further tightening remains wide open. According to Reuters, the ECB will "hold the door wide open to another rate hike in September, as a fresh jump in energy prices threatens to put more upward pressure on inflation." Financial markets now price in between two and three more rate hikes ahead, with the first move fully priced in by October and the second by next April.93.3 The Drive

Inflation Risks Linger

Interest rate swap markets imply an 85% probability of a quarter-point increase at the ECB's next meeting on September 10, according to Morningstar. A Reuters poll found that 70% of respondents — 52 of 74 economists — expect one more hike this year, likely in September.Morningstar, Inc.+1

"With the ECB having taken firm action last month, there is no rush to hike interest rates again this month," said Michael Field, chief European markets strategist at Morningstar. ING's global head of macro, Carsten Brzeski, noted that the absence of fresh staff projections on inflation and growth makes an immediate move unlikely.Morningstar, Inc.

Geopolitics Drive the Outlook

The ECB's June staff projections see headline inflation averaging 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. The conflict in the Middle East, including Red Sea tanker attacks that have pushed crude oil prices higher, remains the central uncertainty. Bloomberg reported last week that while officials initially drew confidence from Washington-Tehran peace negotiations, a renewed flare-up has complicated the outlook.youtube+3

ECB Governing Council member Pierre Wunsch told Reuters in June that the bank may need another hike "if we continue to see this trend" of inflation spreading beyond energy into services and wages. His colleague Martins Kazaks, however, said there was "no rush" given diplomatic progress at the time. The September meeting now looms as the pivotal moment for the ECB's next move.Bloomberg+1