The European Central Bank kept all three main interest rates on hold at its July meeting, leaving the deposit rate at 2.25%, the main refinancing rate at 2.40% and the marginal lending rate at 2.65%. The decision, widely anticipated by markets, follows a 25-basis-point increase in June—the first tightening in nearly three years—and reflects a deliberate pause to assess how the renewed escalation of the Iran conflict and the near-closure of the Strait of Hormuz will feed through to eurozone prices. In its statement, the Governing Council noted that “uncertainty remains high and the full inflationary impact of the energy shock has yet to play out,” while stressing that energy price prospects, though highly volatile, currently lie close to the baseline scenario of the June staff projections.

Viewed from Frankfurt, the pause is a tactical one. The June rate rise was designed to signal resolve against an inflation rate that, at 2.8% in June, remains above the 2% target, even as it eased from 3.2% in May. The central bank’s own analysis, echoed by economists in London and Milan, suggests that the pass-through of higher energy costs to core prices and wages has so far been limited. Services inflation slowed last month, and wage growth continues to ease, particularly in Germany. Yet the resumption of US-Iran hostilities and Houthi attacks on Saudi tankers in the Red Sea have driven Brent crude back above $98, threatening to reignite headline inflation just as the summer driving season gets under way. The ECB’s baseline scenario from June had pencilled in oil at around $97 by year-end, meaning the current price spike does not yet, on its own, force an immediate policy response.

Market pricing, however, already embeds further tightening. Swaps indicate a 25-basis-point hike is fully priced for September, with a second move seen by year-end, taking the deposit rate to 2.75%. Analysts at major European banks and asset managers view the September meeting—backed by new staff macroeconomic projections—as the natural moment for the next step, provided inflation does not surprise sharply to the downside. The ECB’s data-dependent, meeting-by-meeting approach leaves it uncommitted to any preset rate path, but the Governing Council’s statement that it is “well positioned to navigate the uncertainty caused by the conflict” suggests a bias to act if second-round effects begin to materialise. The labour market, with unemployment at a record low of 6.2%, remains a potential conduit for a wage-price spiral, though for now it is a risk rather than a reality.

The next factual milestone is the ECB’s 11 September policy meeting, when updated staff forecasts will provide a clearer picture of the inflation trajectory. Until then, the central bank will monitor the intensity and duration of the energy shock, as well as any indirect effects on broader price-setting. The path of rates remains tightly linked to geopolitical developments in the Middle East, with any further disruption to energy supplies likely to tilt the balance toward additional tightening.