The European Central Bank held the benchmark deposit rate unchanged at 2.25% on Thursday, after a hike in June. This pause was largely expected after June’s inflation eased on a pullback in global prices, while core measures and oil futures pointing to limited spillover effects. Markets are likely to build in a higher likelihood of a follow-up hike in September after yesterday’s commentary on inflation highlighted that the full impact of the energy shock was still to play out. The Governing Council pointed to risks that showed that the inflation outlook was skewed to the upside, marking a shift from early-July’s stance at Sintra where it was a more balanced outlook. Prevailing energy prices are close to the ECB’s baseline assumptions, affirming that the scenario analysis is shifting towards a more cautious gear.
We believe the stage is set for another rate increase at the September meeting, in line with our view that another 25bp hike was on the cards in 3Q26. Alongside clarity on the evolving Middle East situation, updated quarterly staff projections will also be on hand by then. To recall, June’s projections pointed to inflation peaking at 3% this year before cooling off to 2.3% in 2027. Core was expected to stay above target this year and next at 2.5% before easing to 2.2% in 2028. More real economy inputs, by way of 2Q GDP, sentiment surveys and real data will also be on hand by then to gauge signs of material impact on the growth outlook. Add to this, US has imposed a fresh 10% tariff on the EU in the latest announcements, after the previous applicable rate expired this week. Primary consumer and industrial goods will fall under the tariff umbrella, while energy products, agri & chemicals, goods under Section 232 (e.g., steel and aluminium etc. to avoid stacking), amongst others, are likely to be exempted. Retaliatory action by the EU is unlikely as the new rate is below the 15% ceiling, i.e. Turnberry cap, in the existing trade pact and that the new rate prevents duty-stacking. Bilateral relations are, nonetheless, likely to stay strained as the EU seeks to differentiate Big tech regulation (after a top US tech company was fined under the Digital Markets Act) from trade policy. Separately, political developments in the core countries and an increase in the defence spending are matters of interest for the bloc.
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