The European Central Bank is likely to raise interest rates again at its September meeting, according to analysts at Barclays.
However, falling oil prices and signs that headline inflation may have peaked could encourage the ECB to adopt a more cautious approach in the coming months.
Barclays Expects Another ECB Rate Hike
The ECB increased interest rates in June for the first time in almost three years.
The move made it the first G7 central bank to respond to energy-driven inflation by raising borrowing costs.
The ECB also lifted its inflation forecasts for 2026 and 2027. Policymakers warned that the joint U.S.-Israeli military action against Iran was adding to inflationary pressure across the eurozone.
Eurozone Inflation Slows in June
Annual inflation across the 21-member euro area fell to 2.8% in June, according to preliminary Eurostat data.
This was below the 3.2% recorded in May and also lower than economists’ forecast of 3.0%.
Despite the slowdown, Barclays analysts Silvia Ardagna and Mariano Cena said some inflationary pressure may still be moving through the economy.
They pointed to the European Commission’s selling-price expectation indicators, which remain above historical averages and pre-war levels.
Manufacturing and Retail Costs Remain Elevated
Price expectations remain especially high in the manufacturing and retail sectors.
According to Barclays, four consecutive months of elevated energy prices may continue to affect the cost of goods and services outside the energy sector.
This means businesses could still pass higher costs on to consumers, even as headline inflation begins to ease.
Falling Oil Prices Reduce Inflation Pressure
Energy prices recorded the strongest annual increase among the main inflation categories in June.
However, energy inflation slowed to 8.7%, down from 10.8% in May.
Brent crude oil prices have also returned to around pre-war levels following a framework peace agreement between the United States and Iran.
Oil had previously surged above $110 per barrel after fighting began in late February.
The rise was largely driven by the effective closure of the Strait of Hormuz, a key route for around one-fifth of global oil and liquefied natural gas supplies.
Europe Remains Exposed to Energy Disruptions
Europe was less exposed to the closure than some other regions, but the conflict still affected the continent.
Attacks on major natural gas production facilities in the Gulf placed additional pressure on European energy markets.
The sharp rise in energy costs increased fears that inflation would spread to a wider range of goods and services.
Core Inflation Also Declines
Price growth for services, food, alcohol and tobacco moderated in June.
Core inflation, which excludes volatile items such as food and energy, slowed to 2.4%.
This was below the previous reading of 2.6% and slightly lower than the 2.5% forecast by economists.
The decline suggests that underlying inflation pressures may also be easing.
Lagarde Defends the June Rate Increase
ECB President Christine Lagarde discussed the central bank’s policy stance at a major central banking forum in Portugal.
She rejected the idea that the June rate increase was simply an insurance measure against higher inflation.
Instead, Lagarde said the decision was appropriate across a wide range of possible inflation outcomes.
She also noted that the eurozone is entering a period of more frequent supply shocks.
ECB Policy Must Remain Flexible
According to Barclays, Lagarde suggested that the eurozone economy could increasingly find itself between two types of shocks.
Some disruptions may be temporary and can be overlooked by policymakers. Others may require a stronger monetary policy response.
Lagarde also stressed that economic shocks are evolving quickly, meaning the ECB must remain ready to adjust its policy stance.
September Decision Remains Uncertain
Despite defending the June rate increase, Lagarde did not provide a clear signal about the ECB’s next move.
She said that risks to both eurozone inflation and economic growth had become more balanced.
Other members of the ECB Governing Council have also indicated that all options remain available for future meetings.
Barclays nevertheless expects the central bank to deliver another interest rate increase in September.
