Key Takeaways
- The ECB maintained key interest rates at 2.25% following its 0.25 percentage point hike in June.
- Energy prices have soared since the beginning of the month as the US-Iran war flared up once more.
- Markets are pricing in one more rate hike in September, with a near 50% probability of another rise in December.
The European Central Bank kept its key interest rate unchanged at 2.25% on Thursday, as expected, despite a renewed escalation in the Middle East that sent energy prices higher.
“The outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the conflict in the Middle East,” the ECB said in its press release.
The ECB said uncertainty remains high and the full inflationary impact of the energy shock has yet to play out.
Stock, bond, and currency markets’ reaction was muted as the rate decision had been widely expected.
“The ECB keeping rates on hold was well flagged, and expected by economists,” says Michael Field, Morningstar’s chief European markets strategist. “But the key from the statement today was around future expectations. The belief that the bank could raise rates once again in September is growing, with the war in Iran ongoing, and oil back above USD 98 per barrel.”
The Iran-backed Houthis resumed attacks on commercial shipping on July 23 for the first time in months, expanding the conflict beyond the Strait of Hormuz to another critical oil shipping route in the Red Sea.
Futures markets have repriced the ECB outlook over the past week, with rate expectations shifting higher. Markets are pricing in a significantly higher probability of rate hikes in September and December, along with a higher peak policy rate over the coming year.
What Are the Key ECB Interest Rates?
The ECB began a cycle of rate hikes in July 2022, raising the deposit rate from -0.50% to 4.00% through 10 consecutive increases. From September 2023, it cut interest rates eight times, bringing the benchmark rate back to 2.00%, before policymakers resumed tightening in June 2026.
Since June 17, the three ECB key interest rates are:
- Deposit rate: 2.25% (up from 2.00%)
- Main refinancing rate: 2.40% (up from 2.15%)
- Marginal lending facility: 2.65% (up from 2.40%)
Inflation Outlook Darkens as Oil and Gas Prices Surge
Final euro area inflation for June came in at 2.8%, in line with the flash estimate and below the consensus forecast of 3%, though still above the ECB’s 2% target. Core inflation, which excludes volatile components such as energy and food, was also confirmed at 2.4%, down from 2.5% in May.
Goldman Sachs says the recent energy-price shock has largely undone the disinflationary progress seen earlier this year.
Brent crude oil has jumped by 35% since the beginning of July as the Middle East conflict spread. Similarly, natural gas prices have shot up, with benchmark TTF front-month quotations up 51% since the beginning of the month.
“We continue to expect the governing council to hike a second time at its September meeting,” the analysts say. “While our base case is that the ECB then remains on hold, the risks are skewed towards further tightening if persistently higher energy prices cause the inflation outlook to deteriorate further.”
Yet according to Goldman Sachs, there are no signs of second-round effects, where companies pass on higher costs to consumers, who then demand higher wages.
“The latest rise in energy prices led to fresh concerns about a more prolonged stagflationary shock, with investors pricing in more inflation as a result,” says Deutsche Bank Research. Markets are now pricing the most restrictive ECB path in several months.
DWS economists forecast headline inflation to return to 2% in the second half of next year, potentially even a touch below that level. Meanwhile, core inflation is likely to remain somewhat higher, mainly because of services inflation.
When Are the Next ECB Meetings in 2026?
- Sept. 10, 2026
- Oct. 29, 2026
- Dec. 17, 2026
Will the ECB Hike Rates in September?
Markets are now pricing a high probability of a September rate hike. BlackRock analysts also see “limited evidence of second-round effects at this stage, and the current energy shock remains less severe than that experienced in 2022.”
“As a result, we view a prolonged hiking cycle into deeply restrictive territory (above a 3% ECB rate) as unlikely. Markets appear to be pricing a slowdown rather than a recession, with growth expected to remain positive, albeit below trend,” BlackRock’s analysts say.
Amundi Investment Solutions expects one additional precautionary rate hike in September. “Core inflation remains above the ECB’s target, but weak economic growth argues against a prolonged hiking cycle,” says Thomas Kruse, chief investment officer at Amundi Germany. “As inflation gradually normalizes, the ECB could ultimately resume cutting interest rates in the third quarter of 2027.”
“The ECB finds itself in something of a tight spot at the minute, with so many moving parts of the equation, all signaling different things,” says Morningstar’s Field. “Inflation is moving downward and economic growth is weak, which would usually call for rate reductions. But, the lurking fear is that the ongoing war will reignite inflation.”
“Considering all this, the ECB is going with the wait-and-see-approach, preparing to take further action down the line if necessary. For investors this course of action is being viewed as prudent, with equity markets generally holding up in the face of increased uncertainty,” Field adds.
How Will Higher Rates Affect Me?
Equity markets tend to fall when investors anticipate rate hikes. In bond markets, higher rates push up yields and drive bond prices lower. Higher rates also make existing bonds—particularly those issued when interest rates were lower—less attractive.
Savers, on the other hand, generally benefit as banks tend to raise interest rates on savings accounts. The rates offered to depositors are influenced primarily by the ECB’s deposit facility, which defines the interest banks receive for depositing money with the ECB overnight. Borrowers, by contrast, face higher borrowing costs as mortgages and consumer loans become more expensive.
