ECB Holds Rates at 2.25%, Signals September Hike as Iran Energy Shock Persists

The European Central Bank kept its key interest rates steady on Thursday, holding the deposit rate at 2.25 percent, but signaled that a rate hike in September is increasingly likely as the Iran conflict drives oil prices to $100 a barrel and disrupts energy markets.

The decision to hold was unanimous, ECB President Christine Lagarde said at a press conference, though some governors had questioned whether a rate increase was warranted. “There were some governors who asked themselves whether we should not consider a hike,” Lagarde told reporters.

The hold follows a quarter-point increase in June — the ECB’s first rate rise since 2023 — as the inflationary impact of the war on Iran began to weigh on Europe’s economy. The ECB’s main refinancing and marginal lending rates remain at 2.40 percent and 2.65 percent, respectively.

Eurozone inflation edged down to 2.8 percent in June from 3.2 percent in May, but remains well above the ECB’s 2 percent target. The bank said in a statement that “uncertainty remains high and the full inflationary impact of the energy shock has yet to play out.” It also said it is “closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects.”

Lagarde warned that renewed disruption of energy supplies “could increase energy prices further and for longer than expected.” The bank expects inflation to remain “well above target” until the first half of 2027, she said.

Brent crude oil has returned to $100 a barrel following the resumption of hostilities in the Middle East, according to reports. The ECB had flagged a hold in the weeks leading up to Thursday’s meeting on the assumption that energy prices were falling quickly enough to put the eurozone on track for the mildest of three scenarios it laid out in March. But the recent surge in oil and natural gas prices — the latter hitting more than three-year highs — has reset that outlook. Lagarde acknowledged that the milder scenario “looks quite unlikely, let’s face it.”

ECB President Christine Lagarde emphasized that the long-feared “second-round effects” of higher energy costs — such as wage-price spirals — have not yet materialized. “We are not seeing a second-round effect,” she said, adding that firms surveyed by the bank did not point to such impacts in their pricing or pay decisions, and that wage growth continues to slow. Consumers have dialed back their price expectations, and services inflation slowed last month.

However, Lagarde noted that the longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second-round effects.

**Market Pricing Points to September Hike**

Investors are now betting on almost three more ECB rate increases in the coming year, with a first move fully priced in by October and a second by February, according to reports. Ed Hutchings, head of developed market rates at Aviva Investors, said traders expect a 0.25 percent hike in September. “Inflation expectations remain elevated and if sustained further, even tighter policy may well be needed,” Hutchings said.

Economists broadly agree that a September increase is likely. ING economist Carsten Brzeski said Lagarde’s comments “clearly point to a September rate hike,” adding that the ECB “has again turned more hawkish, suggesting that a September rate hike is almost a done deal.”

Richard Carter, head of fixed interest research at Quilter Cheviot, said that “despite its ability to hold rates today, the market still expects the ECB to be in a rate raising mood for the rest of the year.” He added that the path of policy “depends broadly on what is happening away from the continent.”

The U.S. Federal Reserve and the Bank of England, both of which make rate decisions next week, are also weighing the timing of possible hikes.

**Risks to the Outlook**

Despite the hawkish signals, most economists polled by Reuters say the eurozone may need far less tightening than markets are pricing. The labor market remains relatively soft, particularly in Germany, and surveys point to muted pay pressures. Trade tensions, high energy costs, and China’s expansion into key European export markets are expected to continue weighing on the bloc’s industries.

Lagarde also flagged a potential risk from scorching summer weather in much of Europe. The heat may have damaged crops, pushing up food prices, while low water levels on key rivers could create shipping bottlenecks.

Asked about persistent rumors that she might leave the ECB before her term ends in late 2027, Lagarde said she was not about to depart. “You are not going to see the back of me before 2027,” she said.