The ECB Held Rates Steady in July — But Left the Door Open for September

A Hold, Not a Pause in the Debate

The Governing Council's decision to keep rates unchanged on July 23 comes five weeks after the ECB raised rates in June for the first time in three years, a move driven by the energy shock from the Middle East conflict rather than by underlying euro area growth. Lagarde told reporters the July decision was unanimous, though she acknowledged that some Eurosystem central bank governors had asked themselves whether an additional hike was appropriate this month. The Council opted instead to hold, citing the need to assess how much of the energy shock's inflationary impact has actually fed through to prices, wages and expectations.

Inflation Cooling, But Not Convincingly

Euro area headline inflation declined to 2.8% in June from 3.2% in May. Energy price inflation eased to 8.5% from 10.8%, and food price inflation slowed from 1.9% to 1.5%. Core inflation — excluding energy and food — eased to 2.4% from 2.6%, with services inflation slowing from 3.5% to 3.2% and goods inflation from 0.9% to 0.7%. Despite the improvement, the ECB was explicit that this is not a signal the energy shock is over: it expects the rise in energy costs since the conflict began to keep headline inflation above the 2% target into the first half of 2027, with a decline only expected after that as energy prices fall back and other prices rise more slowly.

Growth Picture: Modest Recovery, Fragile Footing

The ECB noted some improvement in second-quarter economic activity, with services surveys pointing to a partial recovery after the initial shock, and manufacturing holding up on stock-building and higher defence spending. Unemployment stood at 6.2% in May, close to historical lows, though job postings have continued to decline. Bank lending rates for firms and market-based debt costs held steady in May at 3.6% and 4.0% respectively, while mortgage rates ticked up to 3.5%. The Council reiterated its call for the euro area to strengthen its economic fundamentals — simplifying Single Market rules, accelerating the energy transition, and completing the savings and investments union — while keeping fiscal responses to the energy shock temporary and targeted.

Risks Skew in Both Directions

The ECB frames growth risks as tilted to the downside — a renewed disruption to energy supplies, tighter financial conditions, or further trade frictions could all weigh on activity — while inflation risks are tilted to the upside, chiefly if the energy shock intensifies or feeds more strongly into wages and other prices than currently expected. A sustainable resolution to the Middle East conflict is the swing factor the Bank flags most directly: it could ease both the growth and inflation risks at once. Lagarde reiterated that the Bank is not pre-committing to any particular rate path and will base each decision on incoming data between now and the next meeting on September 10.