ECB’s Demarco says bank should not rush next rate hike

A divide has emerged within the European Central Bank's Governing Council over whether to pursue further interest rate increases, as a rapid decline in oil prices following an interim peace agreement in the Middle East reshapes the inflation outlook for the eurozone.

Demarco Urges Patience

ECB policymaker Alexander Demarco, governor of the Central Bank of Malta, said on Tuesday that it would be "prudent not to rush into policy action," arguing that lower energy prices should quickly feed into lower price expectations and keep wage pressures contained. Demarco said the ECB can afford to wait until its next round of staff projections before deciding whether additional tightening is necessary, adding that the "only case for more rate hikes would be tied to second-round effects or deanchoring of inflation expectations," neither of which he sees at present.reuters+1

His remarks came alongside similar comments from Slovenian central bank governor Boštjan Dolenc, who told Reuters Thomson Reuters Corporation ↘ 0.94% that lower oil prices ease pressure on the ECB to act. ECB Chief Economist Philip Lane also noted at the Sintra forum that crude prices have fallen faster than expected following the end of the US-Iran war and the reopening of the Strait of Hormuz, bringing market conditions closer to the ECB's baseline scenario.investinglive+1

Lagarde Signals Measured Approach

ECB President Christine Lagarde, speaking at the annual ECB Forum on Central Banking in Sintra, Portugal, on June 29, framed the current policy environment as fundamentally different from previous crises. "We no longer need to act with the same force. We can make measured adjustments to rates, calibrated to the shocks we face," she said. While she did not explicitly rule out further hikes, Lagarde emphasized that the era of unconventional and forceful responses had given way to a "back to basics" approach centered on data-dependent, meeting-by-meeting decisions.ecb.europa

Lagarde noted that oil prices had fallen from nearly $120 per barrel in March to around $73 following the interim peace agreement, though she cautioned that "the durability of this agreement is far from assured".ecb.europa

Markets Scale Back Expectations

The ECB raised its key deposit rate by 25 basis points to 2.25% on June 11 — its first hike since September 2023 — citing rising inflation driven by the Middle East conflict. At the time, markets were pricing in as many as three additional hikes in 2026. But the swift retreat in energy prices has materially altered expectations. Traders now assign a lower probability to a move at the July 23 meeting and are pricing the next 25-basis-point increase closer to October.global.morningstar+4

Reuters reported that the surprisingly quick drop in oil prices has reduced the urgency for near-term tightening, though one additional rate hike later in 2026 remains possible.investinglive+1