ECB Holds Steady After June Rate Hike as Oil Prices Fall and Inflation Eases

TLDR

• The ECB raised rates by 25 basis points in June, its first hike in roughly three years
• ECB Governing Council member Emmanuel Moulin says the bank is now in a “good position”
• Eurozone inflation dropped to 2.8% in June, down from 3.2% in May
• Brent crude has fallen back to pre-war levels after a U.S.-Iran peace deal
• Barclays analysts expect another rate hike in September, but say lower oil prices could argue for a pause

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The European Central Bank raised interest rates by 25 basis points in June, its first hike in about three years. The move came as energy prices surged following the U.S.-Israeli military campaign against Iran, which briefly pushed oil above $110 a barrel.

Now, with a peace deal signed and oil prices falling, some ECB officials are signaling the bank may be nearing the end of its tightening cycle.

ECB Officials Say Balance of Risk Has Improved

Emmanuel Moulin, the Bank of France governor and ECB Governing Council member, told Bloomberg Television that the bank is currently in a “good position.”

Speaking at the Rencontres Economiques conference in Aix-en-Provence, he said the falling oil price would help ease inflation in services. He added that the bank is not seeing second-round effects at this time.

Moulin was clear that the ECB is not entering a new cycle of rate hikes. He said decisions on July and September meetings will be made when officials get there.

ECB President Christine Lagarde, speaking at a central banking forum in Portugal, pushed back on the idea that June’s hike was simply insurance against rising prices. She argued it was the right move across all inflation scenarios.

Lagarde did not give a clear signal on what comes next, saying only that risks to inflation and growth have become more balanced.

Inflation Slows, But Pipeline Pressures Remain

Eurozone consumer prices rose 2.8% in the twelve months to June, down from 3.2% in May and below the 3.0% economists had expected.

Energy costs rose 8.7% annually in June, slowing from 10.8% in May. Core inflation, which strips out food and energy, came in at 2.4%, down from 2.6%.

Brent crude has now fallen back to roughly pre-war levels following the U.S.-Iran peace framework signed last month.

Despite the improvement, Barclays analysts Silvia Ardagna and Mariano Cena flagged that selling price expectation indicators from the European Commission remain high, especially in manufacturing and retail.

They warned that four consecutive months of elevated energy prices may still push costs higher in sectors outside energy in the near term.

Barclays Still Expects a September Hike

Barclays expects the ECB to raise rates again at its September meeting. However, the analysts noted that lower oil prices and signs that peak inflation may have passed could support a more cautious approach.

Other ECB Governing Council members have said “all options” remain on the table for upcoming meetings. Investors have already scaled back bets on further rate hikes this year.

Bloomberg Economics now believes inflation in the Eurozone has likely peaked.

The ECB’s next scheduled meeting is in July, with another in September.