Rising energy costs from Middle East conflict prompt investors to reassess ECB’s July 22 policy meeting outlook.
Escalating hostilities in the Strait of Hormuz have driven oil prices sharply higher, casting uncertainty over the European Central Bank’s upcoming interest rate decision. Investors are now reconsidering expectations for a hold at the July 22 meeting as energy-driven inflation risks resurface.
The ECB cut rates four times in early 2025, reducing its deposit rate from 3% to 2% by mid-June. However, a 25 basis point hike last month reversed course, lifting the rate to 2.25% amid rising inflation. Eurozone inflation peaked at 3.2% in May before easing to 2.8% in June, though energy costs surged 8.7% year-on-year.
Bundesbank President Joachim Nagel warned of extreme volatility and high uncertainty, emphasizing the need for cautious but decisive monetary policy. Markets are now pricing in a higher probability of another rate adjustment as geopolitical tensions persist.