The European Central Bank is expected to hold borrowing costs steady in July, but rising oil prices and persistent inflation are increasing pressure for another rate increase as early as September.
The European Central Bank is entering a critical phase in its fight against inflation, as renewed energy-market turbulence threatens to disrupt the eurozone’s fragile economic recovery and push borrowing costs higher once again.
The ECB is widely expected to keep its deposit rate unchanged at 2.25 per cent when policymakers meet on July 23. However, a Reuters poll of 74 economists indicates that a majority now anticipate at least one additional rate increase before the end of 2026, with September emerging as the most likely moment for action.
The shift in expectations follows a sharp rise in oil prices linked to renewed conflict in the Middle East and disruption risks affecting major energy-supply routes. Crude prices have climbed by approximately 20 per cent, reviving concerns that Europe could face another period of elevated transport, manufacturing and household energy costs.
For the ECB, the situation presents an increasingly difficult policy dilemma. Eurozone inflation slowed to 2.8 per cent in June but remains above the central bank’s 2 per cent target. Higher energy prices could delay the return to price stability by feeding into electricity bills, transport costs and the prices of goods that require energy-intensive production or distribution.
At the same time, Europe’s underlying economy remains weak. The eurozone expanded by only 0.2 per cent in the latest quarter, while economists have reduced their forecast for annual growth in 2026 to approximately 0.5 per cent. That represents the fourth consecutive downgrade and highlights the region’s limited ability to absorb another increase in financing costs.
Higher interest rates would raise the cost of mortgages, corporate loans and government borrowing. They could also discourage business investment and consumer spending at a moment when several European economies are already struggling with subdued productivity, weak industrial activity and cautious household demand.
The ECB must therefore decide whether the danger of persistent inflation is greater than the risk of suppressing growth. Leaving rates unchanged for too long could allow higher energy costs to spread across the economy, particularly if workers demand wage increases to compensate for rising living expenses. Raising rates too quickly, however, could intensify the slowdown and place additional pressure on heavily indebted businesses and governments.
Energy companies may be among the few immediate beneficiaries of the current environment. Forecasts indicate that rising oil prices could help drive strong second-quarter earnings among large European corporations. Earnings for companies in the STOXX 600 index are projected to rise by more than 15 per cent, but that figure falls to approximately 6 per cent when the energy sector is excluded, revealing considerably weaker momentum across the broader economy.
This divergence illustrates the uneven effect of the energy shock. Oil and gas producers could report stronger profits, while airlines, manufacturers, logistics companies and consumers face higher operating and living costs. Countries that depend heavily on imported energy may be particularly vulnerable.
Financial markets are now closely examining every statement from ECB officials for indications of how policymakers will respond. Roughly seven in ten economists surveyed by Reuters expect another rate increase this year, although a sizeable minority believe the bank will remain on hold as officials wait for clearer evidence that higher oil prices are affecting underlying inflation.
The ECB’s next decision may therefore be less important than the language accompanying it. Policymakers are likely to avoid committing themselves to a fixed path, instead emphasising that future action will depend on energy prices, wage developments and incoming economic data.
Europe has spent several years attempting to escape the cycle of energy shocks, inflation and stagnation that followed earlier geopolitical crises. The latest rise in oil prices demonstrates how exposed the region remains to events beyond its borders.
For businesses and households, the prospect of another rate increase means that relief from elevated borrowing costs may be delayed. For the ECB, it means navigating an uncomfortable choice between protecting economic growth and ensuring that inflation does not become entrenched once again.
