Summary of Key Points
At its meeting on July 23, the European Central Bank (ECB) left all three of its key interest rates unchanged, in line with market expectations. This marks the first time it has decided not to raise rates since the June increase. The reason for this decision is that inflation in the eurozone had just begun to slow down in June, mainly due to a slowdown in energy price increases. However, oil prices have surged again recently due to events such as attacks on oil tankers in the Red Sea, raising concerns about a potential rebound in inflation. Some members of the ECB have advocated for an immediate rate hike, but the decision was made to wait until new data (inflation reports and growth forecasts) are available in September before making a judgment. Markets have already begun to bet on a rate hike in September, with reactions in both the bond and currency markets.
1. No Rate Hike This Time: Inflation Has Given a “Breath of Air”
The inflation rate in the eurozone fell from 3.2% in May to 2.8% in June (with core inflation also dropping to 2.4%), marking the first decline this year. The main reason for this is the slowdown in energy prices, which dropped from 10.8% to 8.5%. In simple terms, previously rapid increases in energy costs had driven up overall prices; now that energy price growth has slowed, inflation has also eased, giving the ECB reason to wait and see how things develop.
2. Hidden Concerns: Rising Oil Prices May Trigger a New Inflation Surge
Inflation, which had just started to decline, is facing new challenges due to soaring oil prices. At the end of June, oil prices were around $72 per barrel; now, following the attack on an oil tanker in the Red Sea (a vital route for Saudi Arabia to bypass the Strait of Hormuz), Brent crude oil prices jumped by 6% in a single day, breaking through the $100 mark. ECB President Christine Lagarde is particularly concerned that the longer oil prices remain high, the more likely other prices will follow suit. For example, higher oil costs for businesses could lead to price increases for their products, which in turn may prompt employees to demand higher wages. This could create a “vicious cycle” (what she referred to as a “secondary effect”). She even suggested that inflation could exceed the ECB’s target of 2% by the first half of 2027.
3. Internal Disagreement: Some Want to Raise Rates Now, but the Decision Was to Wait Until September
Although the decision was unanimously approved, some members of the Governing Council argued for an immediate rate hike. However, most believe that new inflation reports, growth data, and staff forecasts will be available in September, providing a more accurate basis for judgment. After all, there are no latest macroeconomic forecasts available at this time (July is not a quarterly forecasting meeting), and making a hasty decision could carry significant risks. Lagarde also noted that there are no signs yet of businesses raising wages due to rising oil prices, which indicates that the “secondary effect” has not occurred, so there is still time to wait.
4. Markets Are Already Betting on a Rate Hike in September
Following the decision, European bond markets declined, with the yield on German 10-year government bonds rising to 3.23% (the highest level in 15 years), indicating that investors expect interest rates to rise further in the future. The money market even expects two more rate hikes this year. The euro also weakened against the US dollar (from 1.1410 to 1.1370). Institutions agree that a rate hike in September is almost inevitable unless there are no new signs of inflation increasing in the next two months; experts at Ingvaria Investment believe traders are already anticipating a 25-basis-point increase in September.
5. September Data Will Be Crucial
In the coming two months, the ECB will be watching two key factors: whether oil prices remain high and the latest inflation and growth data. The ECB will release its latest staff forecasts on September 10, which will provide a clearer picture of inflation trends. If oil prices continue to rise and inflation rebounds, a rate hike in September is likely. If inflation remains stable, the ECB may choose to wait further. Additionally, the Federal Reserve and the Bank of England will also announce their decisions next week; since the ECB is the only major central bank in the West to have raised rates so far, their decisions will influence the ECB’s own future actions.
In summary, the ECB’s decision not to raise rates this time is temporary. September will be the real test, as oil prices and inflation data will determine whether further rate hikes are necessary. The general public can pay attention to oil price trends, as they not only affect fuel costs but may also impact daily life through rising prices.