Key facts
- Euro zone yields climbed due to Middle East conflict and rising energy prices.
- Most economists polled by Reuters expect the ECB to hold rates on July 23 but hike in September.
- Oil prices have surged, increasing inflation concerns for ECB policymakers.
- Underlying euro zone inflation, excluding energy, also dropped more than expected in June.
- The ECB is considering doubling the minimum reserve requirement for lenders to drain liquidity.
- The ECB has secured parliamentary backing for a digital euro project, aiming for a 2029 launch.
Euro zone yields climbed as renewed fighting in the Middle East pushed oil prices higher, fueling concerns about intensifying inflation pressures. This has led to expectations that the European Central Bank (ECB) may need to raise interest rates again.
A Reuters poll of economists indicated that while the ECB is expected to hold its key interest rate steady at 2.25% on July 23, a growing majority now anticipate a second rate hike this year, likely in September. This shift in expectations comes as oil prices have surged following the escalation of conflict in the Middle East, prompting markets to price in further rate increases.
Despite recent data showing euro zone inflation eased to 2.8% in June, it remains above the ECB's 2.0% target. Policymakers face a delicate balance between controlling inflation and supporting a fragile economy. The limited rise in oil prices compared to earlier in the war means the picture hasn't changed materially from policymakers' expectations in June, boosting the case for a July hold.
The ECB is also considering doubling the proportion of cash that lenders must keep as reserves, a move that would drain liquidity. Separately, the ECB has secured key parliamentary backing for its digital euro project, with negotiations for a final law expected by year-end and a pilot program to start next year.