ECB holds rates unchanged and signal hike in September

The European Central Bank, as widely expected, left interest rates unchanged in its July policy meeting in Frankfurt today, but signaled rate hike in September, as worsening geopolitical situation threatens lifting inflation well above ECB’s 2% target.

The ECB policymakers opted to stay on hold this time, after 25 basis points hike in June, as the latest economic data was more benign and provided temporary relief.

Fresh escalation of the war in the Middle East has pushed oil price to 100 per barrel and lifted again natural gas prices, after a calmer period, as major supply routes were closed again, threatening with energy shock and its full impact on inflation that keeps the central bank highly alerted.

While the ECB talks about rate hike in September and repeats the mantra of closely watching the situation and being ready to act accordingly, markets bet for three rate hikes in coming year, with different timing and economists add to mixed outlook by pointing on geopolitics as key oil market driver, and do not expect stronger rise in consumer prices.

However, overall picture remains negative and can deteriorate further, as high oil prices provide domino effect on the whole economy and add to persisting problems with trade tensions, China’s expansion into some of Europe’s key export markets that would further weigh on already struggling bloc’s industries and maintain strong pressure on the central bank.