ECB Ready for Second Rate Hike in July Amid Middle East War Impact

The European Central Bank (ECB) is prepared to raise interest rates for a second consecutive meeting in July if the Middle East war shock necessitates it, stated Governing Council member Joachim Nagel. The Bundesbank president noted that high energy costs are affecting core inflation, making Thursday’s deposit rate increase essential even if the situation moderates quickly.

Nagel emphasized that the Governing Council keeps all options open and is ready to respond again, maintaining a data-dependent, meeting-by-meeting approach. This follows the ECB's first borrowing cost hike since 2023, reacting to inflation driven by the Iran war. Consumer prices in Europe rose over 3% in May, and business activity is declining.

ECB President Christine Lagarde warned of the energy shock broadening through the economy. Markets anticipate two more quarter-point hikes, with another possible in July. The International Monetary Fund also stated that further tightening is required to control prices, projecting a cumulative 50 basis points increase this year to prevent headline and core inflation from exceeding 2% into 2028.

Nagel reiterated that the price outlook has worsened, and the shock is strong and persistent, necessitating the interest-rate step. Other Governing Council members, Primoz Dolenc and Ulo Kaasik, acknowledged the uncertainty but stressed inflation risks are to the upside. Austrian member Martin Kocher affirmed the ECB will act decisively to meet its 2% medium-term price target, preventing the current shock from entrenching in inflation expectations.