ECB keeps rates steady, flags September hike as likely

The ECB held its three key rates unchanged at the July meeting, with the deposit rate at 2.25%. Lagarde said the economic outlook had returned to the baseline from June, following recent energy price developments. The risk assessment also reverted to the June stance, compared with the Sintra conference where she had described risks as "more balanced."

Lagarde struck a relatively upbeat tone on growth. Services activity is recovering, manufacturing is holding up, and fiscal and AI spending are supportive, she said. The weak June inflation print was likely temporary, she stressed, as selling price expectations have risen and the energy shock has yet to fully pass through. That assessment makes a September rate hike very likely.

She also made clear the ECB is not seeing second-round effects. Wage growth is still expected to decline over the forecasting period. That is a key reason to expect only one additional hike from the ECB, against market pricing of roughly two this year.

Lagarde gave little guidance. The market barely moved. Some Governing Council members asked themselves whether a hike was needed, she said. The committee decided unanimously to wait for more data and new staff projections before potentially raising the policy rate.