ECB Set to Hold Rates as Inflation Eases—but September Hike Remains Live

Frankfurt, 21 July 2026 — EBM Newsdesk Analysis- Anthony Gill

The European Central Bank is expected to leave interest rates unchanged on Thursday, pausing after last month’s increase as falling eurozone inflation gives policymakers time to assess whether the latest energy shock will spread into the wider economy.

Annual inflation across the currency bloc fell to 2.8% in June from 3.2% in May. Core inflation, excluding energy, food, alcohol and tobacco, eased to 2.4%, while services inflation declined to 3.2%. Energy prices were still 8.7% higher than a year earlier, but the broad slowdown has reduced the immediate pressure for another increase.

The ECB raised its deposit rate by 25 basis points to 2.25% in June in response to inflationary pressure generated by the Middle East conflict. Its main refinancing rate now stands at 2.40%, while the marginal lending rate is 2.65%.

A Reuters poll of 74 economists found overwhelming expectations that the Governing Council will hold rates at its 23 July meeting. The more important question for markets is whether the pause lasts beyond the summer.

Inflation has fallen, not disappeared

June’s figures are reassuring without being comfortable.

Inflation remains above the ECB’s 2% target, and part of the monthly improvement reflects a moderation in energy inflation following the sharp increases recorded earlier in the spring. Services prices—closely watched because they are influenced by domestic wages and demand—are still rising faster than the headline rate.

The ECB’s June projections forecast average inflation of 3% in 2026 and 2.3% in 2027, with a return to 2% expected only in 2028. Inflation excluding energy and food is projected to average 2.5% in both 2026 and 2027.

That leaves the Governing Council balancing two risks. Raising rates too quickly could deepen an economic slowdown that is already affecting investment and credit demand. Waiting too long could allow another energy shock to feed into freight, food, wages and consumer prices.

For now, the softer June data favours patience.

Oil keeps September in play

A July pause would not mean the tightening cycle is over.

Brent crude has risen sharply again following renewed fighting between the United States and Iran and further disruption in the Strait of Hormuz. Around 70% of economists questioned by Reuters expect the ECB to raise rates at least once more this year, with September viewed as the most likely meeting.

The argument for another increase rests less on June’s inflation figure than on what follows it.

A short-lived rise in oil prices would lift headline inflation temporarily but might not justify further action. A sustained shock would be more dangerous, particularly if companies pass higher transport and production costs to customers or workers seek compensation through higher wages.

The published account of the ECB’s June meeting showed policymakers confronting that distinction. Market-based inflation expectations had fallen from their April highs, but remained above 3% for 2026 and above the ECB’s target for 2027.

Christine Lagarde is therefore unlikely to declare victory on Thursday or suggest that rates have peaked. The ECB has repeatedly said that its decisions will be made meeting by meeting and that it is not committing to a predetermined path.

Growth strengthens the case for restraint

The case for holding rates is reinforced by weak economic activity.

Eurozone growth was only 0.2% in the latest quarter, while economists surveyed by Reuters expect the economy to expand by just 0.5% during 2026. Higher energy costs are weakening consumption and industrial profitability at the same time as tighter financing conditions are reaching companies and households.

The ECB’s latest bank lending survey shows that banks moderately tightened credit standards for companies during the second quarter and expect further tightening across all loan categories in the third. Rejection rates increased, with the car industry and energy-intensive manufacturing facing particularly restrictive conditions.

Companies are already feeling the impact. In a separate ECB survey, a net 42% of eurozone firms reported increases in bank lending rates during the second quarter, up from 26% in the previous survey. Financing needs rose slightly, while loan availability remained broadly unchanged.

Another ECB increase this week would therefore strike an economy in which monetary conditions are already becoming more restrictive without additional intervention from Frankfurt.

A pause, not a pivot

The most likely result on Thursday is a hold accompanied by a warning.

Falling inflation gives the ECB sufficient evidence to wait. Weak growth gives it a reason to do so. But elevated oil prices, persistent services inflation and the possibility of second-round effects prevent policymakers from signalling that the danger has passed.

For European businesses, the distinction matters. A July pause may stabilise borrowing costs for several weeks, but it does not promise cheaper credit. Banks are tightening their own approval standards, and markets still expect another rate increase to remain under consideration in September.

The ECB’s position is therefore less dovish than the headline decision may appear.

It is holding fire because the latest inflation data have bought it time—not because Europe’s inflation problem has been solved.