ECB July minutes show policymakers saw another rate hike as likely

The European Central Bank released the account of its July 22-23 policy meeting on Thursday, revealing that policymakers viewed another interest rate increase as likely necessary to return inflation to its 2% target. The minutes set the stage for a rate hike at the ECB's September 9-10 meeting, with markets now pricing in a roughly 96-97% probability of the deposit rate rising from 2.25% to 2.50%.reuters+2

A Pause, Not an End

The ECB held rates steady at its July meeting but twice described the decision as a "pause" in rate hikes rather than a signal that tightening had concluded, according to Reuters. The account stated that "another rate hike would likely be necessary unless the inflation outlook improved significantly."reuters

The Iran conflict and its effects on energy prices featured prominently in the discussion. Policymakers noted that while second-round effects from energy shocks had not yet become embedded in wages and prices, upside risks to inflation remained. Some members argued for raising rates at the July meeting itself, stressing "the low likelihood of a situation in which a further rate hike would not be warranted."think.ing

Schnabel Reinforces Hawkish Stance

ECB Executive Board member Isabel Schnabel bolstered expectations earlier this week, telling Bloomberg that borrowing costs must rise further given the ongoing Middle East conflict and the eurozone's resilient economy. "At the current policy rate, inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary," Schnabel said.barchart+1

Supporting the case for action, data released Thursday showed eurozone bank lending to corporations rose 4.4% in July, the fastest pace in more than three years. Business activity surveys have also shown the eurozone economy performing better than expected, with ING noting that European manufacturers have benefited from disruptions to Asian competitors caused by the closure of the Strait of Hormuz.indexbox+1

What Comes After September

The EUR/USD pair traded near 1.1655 in early European hours on Thursday, supported by the hawkish ECB outlook. A September hike would mark the second increase this year following a June move that was the ECB's first in nearly three years.fxstreet+1

Whether the ECB will tighten beyond September remains uncertain. ING analysts noted that an additional hike would still place the deposit rate within what the ECB considers the neutral range, but going further "would mean that the ECB sees restrictive monetary policy as necessary," a step that remains difficult to justify against what is still a supply-side shock rather than an overheating economy.think.ing