Since the Iraq War, the first major central bank to raise interest rates—will the European Central Bank raise rates again in July?

Since the Iraq War, the first major central bank to raise interest rates—will the European Central Bank raise rates again in July?

The central bank has chosen a difficult path: raising interest rates while the economy slows down.

On June 11 local time, the European Central Bank announced in Frankfurt that it would raise its benchmark interest rate by 25 basis points—the first rate hike in nearly three years. This move has been dubbed the "Hormuz rate hike" by the market—the trigger being the energy price shock caused by the Iran war. In May, the Eurozone inflation rate rose to 3.2%. The ECB’s latest quarterly forecast shows that this year’s price increases will exceed previous expectations, and inflation is not expected to return to the 2% target until 2028.

At the same time, the ECB lowered its 2026 economic growth forecast from 0.9% to 0.8%. The combination of rate hikes and slowing growth means Europe is facing stagflation pressures.

What the market is more concerned about is: will there be another rate hike in July?

July will likely see a pause, but with conditions

According to Reuters, citing two informed attendees, if energy prices remain near current levels, staying put during the July 22 meeting is the "more likely option."

One insider was more specific: Unless Brent crude oil price surpasses $100 per barrel, there will be no rate hike in July—because the current rise in energy prices has not yet shown "secondary transmission" to other goods and services.

The other insider added that a surprise jump in core inflation could also trigger action.

In other words, pausing in July is the baseline scenario, but this "pause" is conditional and not unconditional.

Both insiders pointed out that the ECB's latest forecast already factors in two additional rate hikes. This means that even if July is unchanged, the policy path is not closed—September could see action again, provided there’s no substantial improvement in the inflation situation.

This approach is similar to "take it step by step": raise rates once first, observe energy prices and inflation transmission, then decide the next step. The ECB spokesperson declined to comment on the above news.

Controversy over rate hikes: Tightening monetary policy amid supply shocks, is it right?

This rate hike is not without controversy. Bloomberg reports that this bout of inflation is mainly driven by supply-side shocks, rather than overheated demand. Therefore, there is no consensus among observers as to whether a rate hike is the appropriate response.

The logic for the hike is: prevent the rise in energy prices from spreading to broader prices and preserve inflation expectations.

But the cost is direct: tightening financial conditions will suppress economic activity. Europe’s current growth largely relies on government fiscal spending—much of which is funded by borrowing. Rising interest rates mean the cost of these debts is also increasing.

Italy has already called on the EU to loosen fiscal rules to cushion the pressure from energy price shocks. As borrowing costs rise, discussions about Europe’s debt sustainability are expected to intensify.

Bloomberg’s commentary notes that, for Europe, all of this has a "familiar sense of powerlessness"—after nearly 18 months of Trump’s presidency, Europe once again can only passively follow, having almost no influence over the root cause of the crisis—the Iran war.

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