The European Central Bank is widely expected to keep interest rates unchanged at its July 23 meeting. However, a growing number of economists believe the ECB could raise borrowing costs again in September as rising energy prices threaten to intensify inflation.
ECB Expected to Hold Rates in July
All 74 economists surveyed by Reuters between July 13 and July 16 predicted that the ECB would leave its deposit rate unchanged at 2.25% at its upcoming meeting.
This forecast is also consistent with current financial-market expectations.
The ECB has already increased interest rates once this year. In contrast, several other major central banks, including the US Federal Reserve, Bank of England, and Bank of Canada, have yet to follow the same path.
Energy Prices Raise Inflation Concerns
Oil prices have climbed approximately 20% following renewed conflict in the Middle East.
The latest increase came after the collapse of a ceasefire arrangement between the United States and Iran. As a result, markets are now pricing in two additional ECB rate increases this year, compared with only one before tensions escalated again.
Higher oil, natural gas, and electricity prices could eventually raise production costs and consumer prices across the eurozone.
September Rate Hike Gains Support
Around 70% of economists surveyed, or 52 out of 74 respondents, expect the ECB to raise rates one more time before the end of the year.
Most believe the next increase will come in September. This represents an increase from the roughly 60% who predicted another rate hike in the previous month’s survey.
Chris Scicluna, head of economic research at Daiwa Capital Markets, said the ECB may have needed to tighten policy again even without the latest disruption around the Strait of Hormuz.
He noted that gas and electricity prices have risen significantly. These developments are likely to influence the ECB’s updated economic forecasts in September, although policymakers may decide that an immediate July increase is unnecessary.
Inflation Remains Above the ECB Target
Preliminary official data showed that eurozone inflation slowed to 2.8% in June.
Despite the decline, inflation remains considerably above the ECB’s 2% target. This leaves policymakers with a reason to consider further tightening.
However, weak economic growth and limited evidence that energy inflation is spreading into wages and broader prices support a more cautious approach.
ECB Faces a Difficult Policy Decision
The ECB must balance the danger of reacting too aggressively against the risk of responding too late.
In 2011, the central bank raised interest rates after an increase in energy costs. Many economists later viewed that decision as a policy error because economic conditions weakened soon afterwards.
By contrast, the ECB’s delayed response to supply-driven inflation following Russia’s invasion of Ukraine in 2022 eventually led to a rapid and aggressive tightening cycle.
These previous episodes highlight the challenges policymakers face when inflation is driven mainly by energy and supply disruptions.
Economists Remain Divided on Further Tightening
Nearly 30% of economists expect the ECB to leave interest rates unchanged for the remainder of the year.
Only three respondents predict that the central bank will deliver two more increases.
ECB officials have remained cautious when discussing inflation risks. However, they have also emphasized the importance of monitoring whether higher energy costs begin influencing wages and other prices.
Alain Durre, head of European macroeconomic research at Natixis, said the balance within the ECB Governing Council currently leans slightly towards policymakers who favour tighter monetary policy.
Nevertheless, weak eurozone growth means officials must remain careful before approving another increase.
Second-Round Inflation Effects Remain a Risk
Economists lowered their average inflation forecasts for 2026 by approximately 0.4 percentage points.
Most of those revisions were made before the latest escalation in the Middle East. It was the first downward adjustment to inflation forecasts in five months.
Despite the revision, inflation is not expected to return to the ECB’s 2% target until the second quarter of 2027. Core inflationary pressures are also forecast to increase.
Simon Wells, chief European economist at HSBC, warned that persistent energy inflation could eventually produce second-round effects.
Higher living costs may lead workers to demand larger wage increases. Companies could then raise prices to cover higher salary expenses, making inflation more difficult to control.
Wells suggested that another rate increase could become appropriate if oil remains near $90 per barrel by September and energy-market risks continue to point higher.
Eurozone Growth Outlook Remains Weak
The eurozone economy contracted by 0.2% during the first quarter.
Economists expect growth of approximately 0.2% in the second quarter, followed by a similar expansion during the current quarter and the final three months of the year.
Overall eurozone growth for 2026 is forecast at just 0.5%.
This represents the fourth consecutive downgrade to the economic outlook and highlights the difficult environment facing the ECB as it considers another rate increase.
