ECB Holds Rates Steady As Oil Risks Loom. Traders Are Betting On A September Hike
The European Central Bank kept interest rates unchanged on Thursday, but financial markets are increasingly betting policymakers will raise borrowing costs again as renewed tensions in the Middle East threaten to push energy prices higher and complicate the fight against inflation.
The ECB voted to leave its main interest rate at 2.25%, a decision that was widely expected by economists and investors after the central bank delivered a quarter-percentage-point increase in June, its first rate hike since 2023.
The pause gives policymakers time to assess the impact of higher borrowing costs while monitoring the effects of rising oil prices triggered by the conflict involving Iran and broader instability in the Middle East. CNBC reported that traders are already pricing in another 25 basis point increase at the bank’s September meeting.
While announcing the decision, the ECB reiterated that it remains committed to ensuring inflation returns to its 2% medium-term target and emphasized that it stands ready to adjust all of its key interest rates if necessary.
The latest inflation data has shown some improvement, with annual eurozone inflation easing to 2.8% last month from 3.2% in May. However, policymakers remain concerned that the recent rebound in energy prices could reverse that progress if oil and gas costs remain elevated for an extended period.
Speaking during a press conference following the policy announcement, ECB President Christine Lagarde warned that renewed disruptions to global energy markets could keep inflation above the central bank’s target longer than previously anticipated.
“Renewed disruption of energy supplies could increase energy prices further and for longer than expected,” Lagarde said. She also cautioned that sustained increases in energy prices could ripple throughout the broader economy. “The longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second-round effects,” she added.
Lagarde said the ECB now expects inflation to remain “well above target” through the first half of 2027, highlighting the challenge facing policymakers as geopolitical developments threaten to offset recent progress on price stability.
Financial markets, however, appear increasingly convinced that another rate increase is coming. According to CNBC, traders are now expecting the ECB to raise rates by another quarter percentage point in September as concerns grow that higher energy costs will fuel inflation expectations across the euro area.
Ed Hutchings, head of developed market rates at Aviva Investors, said investors believe the inflation outlook still warrants tighter monetary policy. “Inflation expectations remain elevated and if sustained further, even tighter policy may well be needed,” Hutchings said.
The June rate hike marked a significant shift in the ECB’s stance after more than a year of holding rates steady. Policymakers cited mounting inflationary pressures linked to higher energy costs following the Iran-related supply shock as a key reason for tightening monetary policy again.
Analysts say the ECB’s path forward remains highly dependent on developments beyond Europe’s borders. Richard Carter, head of fixed interest research at Quilter Cheviot, said markets continue to expect policymakers to maintain a tightening bias for the remainder of the year despite Thursday’s pause. “Despite its ability to hold rates today, the market still expects the ECB to be in a rate-raising mood for the rest of the year,” Carter said.
He added that the pace of future increases will largely depend on geopolitical events and their impact on global energy markets. “Clearly how aggressive it is in upping interest rates depends broadly on what is happening away from the continent, and that is making the job of the policy committee incredibly challenging,” Carter said.
