ECB Set to Slow Hiking Pace, Policy Focus Shifts to September

The ECB is dialing back near-term rate hike urgency and tilting its policy focus toward September, as a sharper-than-expected pullback in energy prices has materially eased inflation pressures, according to people familiar with internal discussions.

Benchmark oil futures have fallen below the ECB’s mild-case inflation projections, supported by stronger OPEC+ supply and fading jet fuel shortage concerns. Meanwhile, China’s ongoing energy substitution has capped crude demand, creating further room for energy price declines.

Even the latest escalation in US-Iran tensions failed to lift oil markets, underscoring improved stability in energy fundamentals. The ECB has not publicly commented on the evolving policy outlook.

Having already hiked rates in June to pre-empt inflation spillovers from geopolitical risks, ECB officials are now adopting a data-dependent approach. The consensus view leans toward delaying additional tightening to September rather than acting at the July 23 policy meeting, with June inflation data set to be the key trigger.

A headline inflation slowdown to the market-expected 3.2% would justify a July pause, while an upside surprise could reinstate near-term hike odds. Softening household and business inflation expectations further support a wait-and-see approach.

Inflation remains distant from the ECB’s 2% target. Baseline forecasts see inflation returning to target by late 2027, while benign energy conditions could push it below 2% by mid-2027.

Market pricing has fully adjusted to the dovish shift, assigning only a one-third probability to a July hike and fully pricing a single rate increase no earlier than October.

While some hawkish policymakers still warn of second-round inflation effects from prior oil spikes, internal assessments show wage and price spillovers remain limited, removing urgency for immediate tightening.