Focus Europe ECB Reaction

Economics Date 23 July 2026 Focus Europe

ECB Reaction: A September hike, at least Mark Wall The 2026 Extel Annual Fixed Income Survey is still open. If you’ve appreciated our Chief Economist work over the last year, it would mean a lot to us if you’d be able to vote. For how and where to vote for us and the DB European Economics team, please see here. Extel's landing site for the awards is here. Thank you! Peter Sidorov, CFA Senior Economist • As expected, the ECB left policy rates unchanged in July. In terms of

messaging, there has been a round trip since the last meeting. The Clemente Delucia implicit hawkishness of June had started to subside in Sintra as oil prices Senior Economist fell post-MOU. It has returned as the conflict in the Middle East re- escalates. The bottom line is, the ECB did not challenge what the market is currently pricing: policy rates rising to 2.75% and possibly higher. Yacine Rouimi Senior Economist • Despite the absence of formal guidance, a hike in September feels more or less a done deal. That some governors were already asking themselves Sanjay Raja whether or not to hike in July underlines the high likelihood of rates rising Chief UK Economist to 2.50% in September. The question is whether 2.50% will mark the end of this tightening cycle or not? We are holding our view that the ECB Michael Kirker stops at 2.50%, but the risks are clearly skewed towards a further hike to Economist 2.75%. For that risk to materialise energy prices will need to remain persistently elevated and/or there would need to be evidence of second- round effects. Both are subject to considerable uncertainty. Maria Contreras Economist Back to June. The key takeaway from the July ECB decision and press conference is that amid all the uncertainty about the status of the ceasefire in the Middle East Kuhumita Bhattacharya the ECB’s thinking on policy is back to where it was in June. By this, President Research Associate Lagarde meant two things. First, that energy prices are close to the June staff ‘baseline’ scenario. Second, the evolution towards a more balanced risk Hema Kumari assessment that Lagarde mentioned in Sintra has reversed back to the June risk Research Associate assessment: upside risks to inflation and downside risks to growth.

No challenge to market pricing. Broadly speaking the market was pricing ECB rates rising to 2.75% at the time of the June meeting and the June press conference did nothing to change that. The market was pricing rates rising to 2.75% ahead of the July decision, with a clear risk of rates rising to 3.00%. The reorientation of the ECB’s messaging away from the potential dovishness of Sintra back to the underlying messaging from June implies a central bank that is not challenging market pricing. As President Lagarde said, the ECB reaction function is “very well understood” by markets.

September hike more or less a done deal. The ECB continues to avoid outright forward guidance. The formal stance is neutral: policy will be set in a data dependent way, meeting by meeting and without pre-commitment. Yet there was nothing in the July press conference to suggest that the ECB will not hike in September. If anything, Lagarde mentioning that some governors were asking themselves whether to hike in July rather than wait – in the end there was

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unanimous agreement to keep policy rates unchanged in July – just underlines the very high likelihood of a second hike to 2.50% in September. Anything can happen, of course. Times are uncertain and energy prices are proving volatile. It’s possible that energy prices fall sharply again if there is renewed confidence in a ceasefire. But with Lagarde viewing the staff’s ‘milder’ scenario as “quite unlikely” at the current juncture, there’s no push back at a hike in September.

Our baseline remains 2.50%. Throughout the energy shock so far we have held the view that the ECB hikes twice to 2.50%, the upper end of the range of neutral. The risks to…