Key Takeaways:
The European Central Bank will keep its deposit rate at 2.25% on July 23, but a 20% surge in oil prices since June is shifting market attention to a potential September hike.
The European Central Bank will hold its deposit rate at 2.25% on July 23, pausing after June's 25-basis-point increase, as a renewed oil rally shifts market focus toward a potential September move.
"Questions about whether a July rate hike was discussed will certainly arise — this discussion could be a way to signal the ECB's current views on September," said Jens Eisenschmidt, chief European economist at Morgan Stanley.
All 74 economists surveyed by Reuters from July 13 to July 16 expect a hold, while about 70% foresee another increase in 2026, most likely in September when updated staff projections are released. Brent crude has risen roughly 20% since the escalation of Middle East conflict, trading near $85 a barrel, reviving inflation concerns after euro-area headline inflation eased to 2.8% in June from 3.2%. Core inflation fell to 2.4%, yet the ECB's June staff projections show headline inflation averaging 3% in 2026 and not returning to the 2% target until 2028.
The tension between sticky inflation and weak growth — GDP is projected at just 0.8% in 2026 — leaves the ECB in a narrow policy corridor where another hike remains plausible but requires evidence that energy-driven price pressures are feeding through to underlying inflation. Markets on Polymarket price a 97.5% probability of no change in July, with the next decision due Sept. 24.
Energy prices reopen the inflation debate
The June hike made the ECB one of the first major central banks to respond to Middle East conflict with monetary tightening, diverging from the Federal Reserve, the Bank of England and the Bank of Canada, all of which have held steady. The relief from lower energy prices that followed the initial conflict spike proved short-lived: Brent crude has climbed back toward $85, while Middle East fertilizer supply disruptions and European heat waves add upside risk to food prices.
"From the overwhelming majority of ECB officials' recent speeches, they are more focused on the risk of renewed inflation than the risk of further weak but resilient growth," said Ross Hutchison, euro-area market strategy head at Zurich Insurance Group.
The ECB's June projections already embedded a higher energy price path, with policymakers revising headline inflation higher on assumed energy costs and their indirect effects on food, goods and services. The question for September is whether the oil rally since then has been large enough or persistent enough to force another revision.
Liquidity tightening and digital euro advance
Beyond rates, the ECB is considering doubling the share of funds banks must hold in non-interest-bearing reserve accounts, a move that would reduce payouts on excess reserves. Societe Generale estimates this could drain about 160 billion euros to 170 billion euros of excess liquidity, compared with roughly 500 billion euros per year currently being withdrawn as the balance sheet shrinks. The impact on short-term funding markets is expected to be modest.
Separately, the digital euro project gained key parliamentary backing in June after years of negotiations with banks concerned about deposit outflows. The European Union aims to finalize legislation by year-end, launch a pilot in 2027 and roll out the digital currency in 2029, reducing dependence on foreign payment networks.
This article is for informational purposes only and does not constitute investment advice.
