ECB Expected to Hold Rates as Inflation Cools, September Hike in View

That comment suggested the council sees less of a tilt to the upside on prices and less downside risk to growth than it did in June. Still, the recent escalation of the conflict in Iran introduces fresh uncertainty over energy supply. The analysts noted they do not expect the formal risk assessment to be changed at this meeting, given the lack of updated projections.

On the forward guidance front, Lagarde is expected to maintain full optionality. At the Sintra conference she reiterated that the ECB has replaced traditional forward guidance with what she called "framework guidance" – a description of the bank's reaction function rather than a commitment to a specific rate path. Markets currently price 22 basis points of ECB tightening at the September meeting. The analysts said the ECB has no incentive to upset those expectations, given the wide range of possible outcomes for energy prices.

The bank's baseline remains that the council will deliver one final 25-basis-point hike in September. The hawkish bias within the governing council persists, though it is slightly more balanced than it was in June, the note said. While crude oil futures have fallen, the prices of refined products and natural gas remain above pre-war levels: gasoline is about 10% higher, natural gas about 170% higher. Consumer inflation expectations are still elevated, and markets price euro-area inflation at an average of 3.25% year-on-year for the rest of 2026 and 2.65% for 2027.

At the same time, second-quarter growth came in weaker than expected. The June inflation print showed no signs of indirect effects from the energy shock, and the labour market is softening. Those factors argue against more than one additional hike, the analysts said. They expect the ECB to begin cutting the deposit rate back toward 2.00% later in the cycle, once the near-term inflation risk fades.

The meeting statement is due Thursday at 1:15 p.m. Frankfurt time, followed by Lagarde's press conference at 1:45 p.m. Traders watching the EUR/USD profile will be parsing her language on the balance of risks above all else.