ECB set to hold rates as Iran tensions keep September hike in play

Matthew Ryan, CFA Ebury

The ECB is set to leave interest rates unchanged on Thursday following June's hike, although renewed tensions surrounding the Iran war have increased the likelihood of another move in September. While policymakers are expected to pause for now, markets are almost fully pricing in a further rate hike after the summer, with President Christine Lagarde's press conference likely to provide the clearest indication of the ECB's next steps.

Key points

ECB expected to leave rates unchanged on Thursday.
Governing Council to remain mindful of inflation risks stemming from the Iran war.
Focus will be on Christine Lagarde's press conference and any guidance on future policy.
Escalating US-Iran tensions make another rate hike in September more likely.
Markets are almost fully pricing in a September hike.
In total, markets are pricing in 44bps of additional tightening before year-end.

The key will be whether Lagarde confirms expectations for a second hike in September, and whether she leaves the door open to further tightening beyond that. Should US-Iran tensions fail to ease, then a September rate increase appears realistic, though she will almost certainly maintain optionality rather than pre-commit.

That said, we remain unconvinced that further tightening is warranted. Growth is weak, wage pressures are cooling, long-term inflation expectations remain anchored, and there are no signs of second-round inflation effects. The ECB risks overcorrecting by tightening policy into what is fundamentally a supply-side energy shock rather than demand-driven inflation.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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