The ECB considers a further rate hike unlikely in July, after a faster than expected decline in inflation in the euro zone.
Meeting in Sintra, Portugal, the European Central Bank (ECB) made a clear adjustment to its communication on its monetary policy, in light of rapid developments in the economic and geopolitical situation. After raising its interest rates on June 11, the institution now suggests that a further increase at its next meeting, scheduled for July 23, is unlikely, while inflation in the euro zone has fallen faster than expected.
A turnaround after geopolitical détente
The ECB raised its interest rate from 2% to 2.25% on June 11, 2026, in a context of tensions in the Middle East having caused a surge in oil prices. Four days later, an agreement between Iran and the United States ended the conflict, leading to an immediate easing of energy markets. Since this agreement, oil prices have fallen, and are now at $71 per barrel, very slightly above their price before the conflict in the Middle East. This decline was faster than expected, with prices having fallen more than $40 since their peak in April.
This turnaround had a direct effect on inflation. In June, prices increased by 2.8% year-on-year across the eurozone, a sharp decline after 3.2% in May. This slowdown can be seen in almost all countries in the region, particularly in France, where inflation was 2% in June, compared to 2.8% the previous month. In the calculation of inflation, the fall in oil prices translated into a decline in energy prices of 1.7% over the month of June.
Faced with these developments, the ECB is backpedaling and suggesting that an increase in interest rates in July is now unlikely. “The risks of an increase in inflation and a decline in growth are more balanced today than a few weeks ago,” recognizes Christine Lagarde, President of the ECB. Official statistics published on June 30 confirm this diagnosis, with inflation clearly slowing.
The outlook for the coming months seems to follow the same trend. “If the [pétrole et le gaz] remain at their current levels, inflation will fall again in July”, observes Jack Allen-Reynolds, of the research firm Capital Economics. An ECB governor specifies: “Events would really have to change significantly between now and then for an increase to be possible.” Martin Kocher, governor of the central bank of Austria, adds on Bloomberg TV: “The threat of inflation has not completely disappeared, but it has clearly diminished, at least in the short term.
Despite this apparent consensus, the debate is not over within the ECB. Board member Isabel Schnabel continues to push for higher interest rates. “Seen from today, we must continue to increase interest rates to bring inflation back to our medium-term target of 2%,” she told Die Zeit on June 26. She hopes to be able to defend this position again at the September 10 meeting.
During the Sintra meeting, which was held on June 30 and July 1, the ECB was also able to speak with Kevin Warsh, new president of the Federal Reserve, in office for less than six weeks. His presence was hailed as a sign of continuity in international cooperation in monetary policy.
Softened perspectives
The ECB had justified its rate increase on June 11 by the need to send a strong signal in the face of inflation considered persistent, while its own forecasts did not see a return to the 2% objective before 2028 without intervention. But the rapid geopolitical détente and the fall in energy prices have changed the situation. A further increase in interest rates by the ECB at its next meeting on July 23 now seems unlikely.
The next meeting is scheduled for September 10.
