ECB Interest Rate Prep

On Thursday the 23rd of July at 08:15 ET, the ECB is set to release the results of their latest monetary policy meeting.
Here are some views on what to expect.

General Expectations
Expectation from Analysts and Market Participants forecast the ECB to keep the Interest Rate and unchanged at 2.15% and the deposit rate unchanged at 2%. With the high and low ranges supporting this.

Investment Bank Commentary
UniCredit
We expect the ECB to leave interest rates unchanged on Thursday as policymakers assess the effects of the 25bp rate hike delivered in June. The decision will probably be unanimous. While the Governing Council (GC) is likely to maintain a data-dependent stance, renewed tensions in the Middle East reinforce our conviction – and that of markets – that the tightening cycle is not over yet.

Energy prices have reversed the decline that followed the signing of the Memorandum of Understanding between the US and Iran, making the benign inflation data for June an “old” piece of information and dealing a major blow to hopes that traffic through the Strait of Hormuz might normalise soon. If energy prices remain around current levels, eurozone inflation will probably fluctuate above 3% for the rest of the year.

The looming risk of military escalation, oil inventories substantially below pre-war levels and intensifying pressure on natural gas prices imply with near certainty that the GC will continue to view risks to price stability as skewed to the upside. At the same time, economic activity and labour markets have remained relatively resilient, strengthening the ECB’s confidence that further policy tightening may be required to prevent the energy shock from feeding into broader and more persistent inflationary pressures.

In this environment, ECB President Christine lagarde will likely refrain from pushing back against the market’s rate- hike expectations. This would indicate a high likelihood of a rate increase in September, when a fresh set of ECB staff projections will provide the GC with a more-comprehensive assessment of the medium-term inflation outlook, leaving the door open for further action if needed.

We continue to expect the September hike to be the last one in this tightening cycle. Barring a further significant escalation in energy markets, the depo rate would remain at 2.50% – the upper end of the ECB’s estimated neutral range – for at least a year. In our base case, inflation returns to 2% by mid-2027 and the eurozone economy does not need a restrictive monetary policy.

Wells Fargo
We expect the European Central Bank (ECB) to leave rates unchanged next week, keeping the Deposit Rate at 2.25%. While inflation remains above the ECB’s 2% target, recent data have been encouraging, with June headline and core inflation moderating from earlier highs. However, renewed tensions in the Middle East continue to pose upside risks to energy prices, which could complicate the disinflation process and delay further progress in underlying inflation.

The ECB’s relatively hawkish tone comes despite theslowing growth backdrop. Wavering consumer confidence, moderating wage growth, and soft forward-looking PMI surveys suggest activity may remain subdued across the euro area. Economic weakness has been concentrated in Germany, where industrial activity and external demand remain under pressure, while service and tourism economies such as Spain have shown more resilience. An uneven growth picture complicates the outlook but is unlikely to outweigh the ECB’s priority of ensuring inflation returns to target.

Easing inflation pressures support a hold next week, but we do not expect the ECB to signal that the inflation fight is over. We continue to expect one additional 25 bps hike later in Q3, likely September, although incoming inflation, wage, and energy data will remain critical to that outlook.

Deustche Bank
The monetary policy outlook is currently dominated by energy prices, dictating the market’s evolving expectations for ECB rate hikes. Initially pricing 2.75% after the first June hike, the market adjusted to 2.50% following the dip in oil prices and dovish signals from President Lagarde. However, renewed Middle East tensions have raised energy prices again, pushing market expectations back to 2.75%.

Despite these fluctuations, a pause in July is expected. Current oil prices remain below 11 June levels, and the June HICP inflation data, which came in softer than expected, cast some doubt on the rapid emergence of indirect inflation. Furthermore, our June dbDIG survey indicated a complete unwinding of the initial energy shock’s impact on household inflation expectations. Waiting until September will provide the ECB with two additional HICP prints and updated staff forecasts, enabling a more informed decision.

We continue to anticipate a second and final hike to 2.50% in September. This measured tightening, bringing policy rates to the upper end of the neutral range, can be justified by the three key components of the ECB’s reaction function: (1) Inflation Outlook and Risks: Even with a potential downgrade in September, the staffs forecast for ex-energy HICP remains sufficiently high to maintain inflation concerns. The recent rise in energy prices also corroborates the ECB’s worry that energy costs may not be contained yet. (2) Underlying Inflation: The ECB continues to believe that some level of indirect inflation is inevitable. The crucial unknowns are its timing, magnitude, and duration. (3) Transmission: Despite initial fears of tightening credit conditions due to geopolitical uncertainty, actual credit data has shown no such effect. By feeding the resilience of growth, this reduces ECB apprehension about further rate increases.

In the July press conference, we expect the ECB to maintain neutral communications. This implies no explicit forward guidance, emphasizing a data- dependent, meeting-by-meeting approach without pre-committing to a specific policy path. While the communication will be neutral, we believe the ECB’s tone on inflation will still convey a hawkish stance, consistent with a further 25bp hike in September being highly probable.