Rising Middle East tensions rekindle inflation concerns! ECB holds rates as expected; September becomes a key window for rate hikes

According to Zhihui Finance APP, the European Central Bank (ECB) kept interest rates unchanged on Thursday, awaiting further economic data to determine whether the inflationary pressures triggered by the Iran conflict require further tightening of monetary policy. The ECB maintained the deposit facility rate at 2.25%, in line with market expectations. Economists and investors expect the ECB to raise rates again by 25 basis points in September, following the June hike. The ECB reiterated that it will not pre-set a policy path and will instead act at each meeting based on the latest economic data.

In a statement on Thursday, the ECB said: "Uncertainty remains very high, and the inflationary impact of the energy shock has yet to fully materialize. Therefore, the Governing Council is closely monitoring the intensity and duration of the shock, as well as its indirect and secondary transmission effects."

Policymakers reiterated that the ECB has ample policy tools to deal with the current complex situation.

After the rate decision was announced, European bond prices changed little, with the 10-year German government bond yield rising 2 basis points to 3.19%. Previously, the yield had reached 3.21%, the highest level since 2011, as surging oil and gas prices heightened inflation concerns.

Market expectations for the future path of interest rates also remained stable. Swap trading indicates that a 25-basis-point ECB rate hike in September is almost a foregone conclusion, and the likelihood of another hike before the end of the year is also nearly 100%. The euro maintained its earlier decline against the US dollar, last down 0.2% at $1.1392.

In June of this year, the ECB raised its benchmark interest rate by 25 basis points, marking its first hike in nearly three years, and making it the first major G7 central bank to take such action since the outbreak of the Iran war. This rate hike also sparked debate about whether the ECB was repeating its 2008 and 2011 mistakes, when premature tightening interrupted the economic recovery.

In June, the ECB warned that inflation triggered by the Iran war had spread beyond the energy sector, although the overall economy remained resilient. Now, policymakers are weighing whether further tightening measures are needed.

In early July, some ECB officials believed that US-Iran peace talks might limit the impact of the war on eurozone consumer prices. However, as tensions in the Strait of Hormuz escalated again, global oil prices have surged back toward $100 a barrel, reigniting inflation concerns.

ECB President Lagarde held a press conference after Thursday's policy meeting. She stated that energy inflation could keep overall inflation well above the target level until the first half of 2027, with the conflict being the main source of uncertainty. Lagarde again reiterated that no forward guidance would be provided.

Markets generally believe that if another rate hike is indeed necessary, the September policy meeting will be the appropriate window for implementation. By then, more inflation data and business climate reports will be available to inform policy adjustments.