ECB

The European Central Bank kept interest rates unchanged on Thursday, holding steady as it waits to see how much of a lingering energy shock from the Middle East conflict will feed through into eurozone inflation.

ADVERTISEMENT

ADVERTISEMENT

The ECB’s governing council held the deposit facility rate at 2.25%, with the main refinancing rate staying at 2.4% and the marginal lending facility at 2.65%.

Monetary policy for the eurozone is set through these three key interest rates, with the deposit facility rate serving as the main benchmark.

“The outlook for energy prices, while highly volatile, currently stands close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the conflict in the Middle East,” the central bank’s statement read.

“Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out. The Governing Council is therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects,” it added.

The decision follows confirmation last week that eurozone inflation eased to 2.8% in June from May’s 3.2%, the first decline this year, with core price growth slowing to 2.4%.

The pause comes just six weeks after the ECB raised rates for the first time in nearly three years, responding to a war-driven energy shock that had pushed inflation to its highest since September 2023.

ECB President Christine Lagarde has been careful to keep the door open.

At the central bank’s Sintra forum, Lagarde insisted June’s move was not an “insurance hike” but a response to a genuine inflation problem, with projections showing a return to the 2% target only in late 2027, and only if monetary policy tightened further.

Lagarde also refused to pre-commit to a path, saying “forward guidance is not currently in the cards.”

July is not a forecasting round and economists at ING, for example, had argued the bank would prefer to wait for September’s fresh projections, when they see a second hike as the more realistic outcome.

The complication is that the shock behind June’s hike is back.

Oil neared $120 a barrel in March before sliding to around $72 after an interim peace agreement at the end of June, but the truce has frayed badly this month, with the US and Iran exchanging fresh strikes, attacks on tankers and renewed sanctions pushing Brent back above $90 a barrel.

A prolonged rise in energy prices would feed through to household bills and headline inflation in the second half of the year, precisely the second-round effects central bankers currently fear.

The ECB and its peers

As the chart shows, Frankfurt tightened from previously being far below its peers.

The Federal Reserve’s target range sits at 3.50% to 3.75% and the Bank of England’s rate at 3.75%, while the Swiss National Bank is parked at zero.

Both of the ECB’s larger counterparts decide again next week.

The Fed announces next Wednesday, with futures markets assigning roughly an 89% probability to a hold, according to CME’s FedWatch tool, after June’s unanimous decision and projections signalling no cuts this year.

The Bank of England follows the next day, on 30 July, with new forecasts in tow and economists overwhelmingly expect a hold at 3.75%, although a Reuters poll found nearly 40% see at least one hike before year-end, after two policymakers voted for an increase to 4% in June.

For now, the ECB is the only major Western central bank to have actually raised rates in this cycle.

Eurostat’s final figures, published on Friday, showed annual inflation easing from 3.2% in May to 2.8% in June, the first decline since prices began accelerating in January, less than a week before the ECB’s Governing Council announces its policy decision on Thursday and decides whether June’s first interest-rate hike in nearly three years should be followed by another increase.

ADVERTISEMENT

ADVERTISEMENT

The details of the release lean towards a pause.

Core inflation, which strips out energy, food, alcohol and tobacco, slowed from 2.6% to 2.4%, energy inflation cooled from 10.8% to 8.5% and services eased from 3.5% to 3.2%, with the headline rate falling in 22 of the EU’s 27 member states.

Among the eurozone’s big four economies, Germany stood at 2.4%, France at 2%, Italy at 3% and Spain at 3.6%.

The numbers matter because of what came before.

In June, the ECB lifted its deposit facility rate from 2% to 2.25%, its first increase in nearly three years, after the war in Iran drove eurozone inflation to 3.2% in May, the highest reading since September 2023.

A reignited Iran war

The complication is that the shock behind that hike has returned.

Oil neared $120 a barrel in March before sliding to around $72 following an interim peace agreement at the end of June, but the truce has frayed badly this month.

The US and Iran have exchanged fresh strikes, Tehran has attacked ships and threatened regional energy exports, and Washington has reimposed sanctions and stepped up its naval blockade, pushing Brent crude back up to $87 a barrel on Friday.

That resurgence has revived the possibility of a surprise hike on Thursday, according to ING, although the bank still expects a hold, with a second increase more realistic in September.

Renewed conflict involving Iran

The complication is that the shock behind that June rate hike has returned.

Oil prices neared $120 a barrel in March before sliding to around $72 following an interim peace agreement at the end of June. However, the truce has frayed badly this month.

The United States and Iran have exchanged fresh strikes, Tehran has attacked commercial shipping and threatened regional energy exports, while Washington has reimposed sanctions and tightened its naval blockade, pushing Brent crude back up to $87 a barrel on Friday.

The renewed escalation has revived the possibility of a surprise rate hike on Thursday, according to ING, although the bank still expects the ECB to hold rates steady, viewing a second increase as more likely in September.

July is also not a forecasting meeting, giving policymakers cover to wait for updated economic projections before taking further action.

What Lagarde has signalled

Speaking at the ECB’s Sintra forum a few weeks ago, ECB President Christine Lagarde insisted June’s rate hike was not an “insurance hike” but a response to a genuine inflation problem. She noted that the ECB’s projections showed inflation returning to its 2% target only in late 2027, and only if monetary policy was tightened further.

Lagarde also refused to pre-commit to a policy path, saying “forward guidance is not in the cards” and that decisions would continue to be made on a meeting-by-meeting basis, guided by incoming economic data.

The ECB remains the only major Western central bank to have actually pulled the trigger.

The US Federal Reserve left its benchmark interest rate unchanged at 3.50%-3.75% in June, at Kevin Warsh’s first meeting as chair, although his hawkish tone unsettled markets.

The Bank of England also left its Bank Rate unchanged at 3.75% in a 7-2 vote, with two policymakers preferring an increase to 4.0%, while the Bank of Japan raised its policy rate to a 31-year high of 1.0%.

The European Central Bank (ECB) took the digital euro project into its next operational stage on Tuesday by naming 36 payment service providers to help test the future currency in a large-scale pilot programme beginning in the second half of 2027.

ADVERTISEMENT

ADVERTISEMENT

According to the ECB, the participants were selected from more than 50 applicants across the euro area and will work alongside the ECB and 19 of the euro area’s national central banks, excluding Bulgaria and Malta, during a 12-month testing exercise.

The pilot is intended to assess the digital euro’s technical infrastructure, operational processes and user experience, allowing person-to-person and person-to-business payments to be tested in both online and offline environments, before any decision is taken on issuing the currency.

The announcement moves the digital euro closer to practical testing with consumers, merchants and payment providers, making it one of the project’s most significant milestones since the ECB launched its preparation phase in late 2023.

The selected providers include traditional banks, digital banks and payment companies, with several of Europe’s largest financial institutions among those taking part, including Deutsche Bank, UniCredit, Revolut, Adyen and Stripe.

ECB Executive Board member Piero Cipollone said the level of interest demonstrated that the payments industry was ready to help shape the project’s next phase.

“The strong market interest in the pilot shows the private sector’s readiness to engage actively and quickly advance with the digital euro project to strengthen the European payments landscape,” Cipollone stated.

“We look forward to deeper engagement as we work with and learn alongside European payment service providers in developing a secure, efficient and inclusive digital euro,” Cipollone concluded.

Legislative approval remains the decisive milestone

The pilot comes as negotiations continue between the European Parliament, the Council and the European Commission on legislation that would establish the legal basis for a digital euro.

The ECB has consistently maintained that it cannot issue the currency unless the legislation is adopted by EU lawmakers.

Current planning foresees formal approval in 2027, followed by completion of the pilot and a possible public launch in 2029, although those timelines remain dependent on the legislative process.

The digital euro would be available free of charge to consumers through supervised payment providers and the ECB has repeatedly sought to counter concerns that it could lead to the disappearance of physical money or weaken privacy protections.

In the current plan for the launch, the digital euro would not pay interest and holdings would likely be capped to avoid significant outflows from commercial bank deposits.

Speaking to Euronews exclusively last week, ECB President Christine Lagarde welcomed the European Parliament’s decision to begin negotiations on the legislation and reiterated that the digital is intended to complement, rather than replace, cash.

“Cash and the digital euro will both be legal tender, which means that nowhere in Europe can someone say, ‘Sorry, I’m not taking your banknotes’,” Lagarde told The Europe Conversation with Maria Tadeo, reaffirming that cash would remain a permanent feature of Europe’s monetary system.

The digital euro is also designed to reduce Europe’s dependence on international payment providers and strengthen the bloc’s strategic autonomy in payments.

Lagarde also told Euronews that the project is about reinforcing Europe’s economic sovereignty as much as modernising payments, pointing to the bloc’s continued reliance on foreign-owned payment networks.

“We depend predominantly on US, but also sometimes Chinese, networks to organise payments. We need to have a European solution because we want to be sovereign at home,” Lagarde stated.

The decision on Stokes and Atkinson brings an element of closure to an extraordinary period, as English cricket has had to deal with yet another off-field controversy.

Without Stokes and Atkinson, an inexperienced England team showing five changes to the one that won the first Test was soundly beaten in the second.

It means Stokes will be back for a crucial decider at Trent Bridge, with England desperate for a series win to alleviate pressure that has grown over the dismal Ashes winter and this latest chaotic episode.

And while Stokes’ return as a leader and all-rounder is vital for his team, there will be renewed scrutiny on his relationship with the rest of the England hierarchy, in particular head coach Brendon McCullum.

All of Stokes, McCullum and director of cricket Rob Key denied the captain and coach were at odds during the Ashes, when England were hammered 4-1.

Speaking on Sunday, after the loss at The Oval, McCullum said he is ready to work with Stokes again.

“We’ve worked together intimately for four years,” said McCullum. “We’ve achieved some cool things and let ourselves down in other things.

“Our motivation, belief and ambition for this side has not wavered. We have robust conversations all the way through and I think that is to be expected when you’re in positions of leadership. There is a mutual respect to how we operate with those.

“I anticipate we’ll be able to work together really well in the week coming and I’m sure that both of us have that same vision for this cricket team.”

Investors are bracing for an ECB rate hike on Thursday. Markets expect the European Central Bank to raise rates by 25 basis points, which could weigh on growth and corporate earnings. Investors are also awaiting guidance on whether further hikes will follow.

ADVERTISEMENT

ADVERTISEMENT

ING said in an analysis on Thursday morning that: “We expect the ECB to hike by 25 basis points from 2.0% to 2.25%, supported by a hawkish tone, but the bar has risen to surprise markets. Despite oil prices testing new lows earlier this week, the EUR curve is increasingly set on three rate hikes.”

Stock markets across Europe opened in positive territory despite the drop in Asian shares following another sell-off in AI-related stocks on Wall Street on Wednesday.

The Euro Stoxx 50 opened 1.2% higher but the broader pan-European Stoxx 600 rose was flat in early trading.

Germany’s Dax and France’s CAC 40 were both up by 1%, while the UK’s FTSE 100 led with a 1.2% gain. Meanwhile, Italy’s FTSE MIB rose by 0.7%.

In other dealings, Asian shares mostly fell on Thursday after another sell-off in artificial intelligence stocks weighed on Wall Street, while oil prices rose.

Japan’s Nikkei 225 lost 0.5%, South Korea’s Kospi fell 0.2%, and Australia’s S&P/ASX 200 slipped 0.2%. Taiwan’s Taiex declined 0.4%.

Hong Kong’s Hang Seng index edged 0.2% higher, while Shanghai’s Composite index dropped 0.2%.

On Wall Street, on Wednesday, the S&P 500 fell 1.6%, marking its first consecutive decline in three weeks. The Dow Jones Industrial Average dropped 1.9%, while the Nasdaq Composite lost 2%.

Wall Street has been unsettled since last week, when AI stocks reversed course after hitting record highs. Investors are weighing whether the recent pullback has eased concerns over excessive optimism or signals the beginning of a more prolonged downturn.

Super Micro Computer, which sells AI servers, plunged 28% after announcing late on Tuesday plans to raise $7 billion through sales of common stock and convertible preferred shares. Companies often seek to raise capital when share prices are elevated, though such moves can dilute existing shareholders’ stakes.

Micron Technology swung between gains and losses before ending down 4.7%. The stock has experienced sharp volatility in recent sessions, having fallen 7.7% last Thursday, dropped a further 13.3% on Friday and then rallied 9.9% on Monday. Despite the swings, its shares remain up 212.5% so far this year.

Nvidia, the chipmaker that has grown into a nearly $4.9 trillion company on the back of the AI boom, was the biggest drag on the S&P 500 after falling 3.7%. Broadcom, another major AI beneficiary, lost 5.1%.

Some pressure on AI-related shares may also be linked to investors raising cash ahead of several high-profile stock market debuts in the United States. SpaceX’s initial public offering could take place later this week.

Weakening stocks for companies with big fuel bills also pulled the market lower. United Airlines sank 6.2%, and cruise operator Carnival fell 6.3% after oil prices rose due to the latest fighting in the war with Iran.

Oil prices and US inflation

Brent crude rose 1.8% to $93.10 a barrel on Wednesday after President Donald Trump warned that Iran would “pay the price” for stalled negotiations between the two sides over the conflict. The war has effectively closed the Strait of Hormuz to oil tankers, disrupting crude shipments from the Persian Gulf to customers worldwide.

Higher oil prices have added to inflationary pressures. A report released on Wednesday showed US consumer prices rose in May at the fastest annual pace in three years.

Traders are increasingly betting that the Federal Reserve will need to raise its benchmark interest rate at least once this year in response to persistent inflation and a resilient labour market.

Higher yields can slow economic growth and weigh on a range of investments, including stocks and cryptocurrencies. They tend to hit the most highly valued assets hardest, and some critics argue that enthusiasm around AI has inflated a market bubble.

In early European trading, Brent crude was up by 0.5% at $93.60 a barrel, while US benchmark crude gained 0.7% to $90.70.

The US dollar traded at 160.58 Japanese yen in the morning. The euro rose slightly to $1.1542, and the UK pound cost $1.3377.

The gold prices dipped by 0.6% to $4,109.60 an ounce.

New research from the European Central Bank suggests that the economic impact of the Iran war may be affecting euro zone consumers more deeply and rapidly than previous geopolitical crises, raising concerns about inflation, slowing growth, and long term economic uncertainty across Europe.

According to ECB economists, European consumers appear to be reacting more sensitively to rising prices and economic instability because many households are still psychologically affected by the financial stress caused by the Russia Ukraine war and the energy crisis that followed in 2022.

The latest conflict involving Iran, triggered after United States and Israeli airstrikes earlier this year, caused major disruptions to global energy supplies and reignited fears of another inflation shock throughout Europe.

ECB researchers found that consumers quickly became more attentive to price increases even while inflation remained close to the central bank’s 2 percent target. Economists believe this reaction reflects growing public anxiety over repeated geopolitical and economic disruptions.

Why It Matters

The findings raise serious concerns for Europe’s economic recovery because consumer confidence plays a critical role in spending, investment, and overall growth.

When households become highly sensitive to inflation and uncertainty, they often reduce spending, delay purchases, and increase savings out of caution. This behavior can weaken economic activity and slow recovery across key sectors including retail, manufacturing, housing, and services.

ECB researchers warned that Europe may now face the risk of a more persistent stagflation environment, where inflation remains elevated while economic growth slows simultaneously.

The Iran war also exposed Europe’s continuing vulnerability to global energy shocks. Despite efforts to reduce dependence on Russian energy after the Ukraine conflict, Europe remains heavily exposed to disruptions in global oil and gas markets.

Although oil prices have recently eased amid hopes for diplomacy, they surged sharply earlier this year during the height of the Iran conflict, intensifying inflationary pressure across the euro zone.

Key Stakeholders

Several major stakeholders are directly affected by the growing economic uncertainty surrounding the Iran war and Europe’s inflation outlook.

European Central Bank

The ECB faces increasing pressure to balance inflation control with economic stability. Policymakers are now widely expected to continue raising interest rates in an effort to prevent inflation expectations from becoming entrenched among consumers and businesses.

European Consumers

Households across Europe remain at the center of the crisis. Rising living costs, energy prices, and borrowing expenses continue placing pressure on disposable incomes and consumer confidence.

Businesses and Industries

European businesses, particularly energy intensive industries, face higher operating costs and weaker consumer demand. Continued uncertainty may reduce investment activity and slow hiring across multiple sectors.

Energy Markets

Global oil and gas markets remain highly sensitive to developments in the Middle East. Any renewed escalation involving Iran could rapidly push energy prices higher again, directly affecting inflation and economic stability in Europe.

Governments Across Europe

European governments may face growing political pressure if inflation remains persistent while economic growth weakens. Policymakers could be forced to increase public spending or introduce additional support measures for households and industries.

Future Outlook

The coming months are likely to become a critical period for the euro zone economy as European policymakers attempt to manage the combined effects of geopolitical instability, inflation concerns, and slowing growth.

Much will depend on whether tensions in the Middle East continue easing or whether new disruptions emerge in global energy markets. A stable diplomatic environment could help reduce inflationary pressure and restore consumer confidence gradually.

However, ECB researchers warn that the psychological impact of repeated crises may continue shaping consumer behavior long after energy prices stabilize. Many Europeans who experienced financial stress during the Ukraine war now appear quicker to react to fears of inflation and economic instability.

The ECB is therefore expected to maintain a cautious but firm monetary stance in the near term, with additional interest rate increases remaining highly likely.

If inflation remains elevated while economic growth weakens, Europe could face a prolonged period of economic stagnation combined with reduced consumer spending and higher borrowing costs.

The situation highlights how modern geopolitical conflicts increasingly influence not only energy and security policy but also consumer psychology, market behavior, and long term economic confidence across global economies.

With information from Reuters.