J.P. Morgan AM: Preview of the ECB meeting on Thursday 23 July
Jorn Veeneman and the EMEA Market Insights team of J.P. Morgan Asset Management share their insights on the ECB meeting on Thursday 23 July:
Main takeaways regarding ECB policy
- The ECB is widely expected to stay on hold in the July meeting.
- We expect one more +25 bps hike at the September meeting, after which the ECB will remain on hold with the deposit rate at 2.50%.
- Our expectation is more dovish than current market pricing which points to +45 bps of tightening by year-end 2026. Two hikes are fully priced by the March 2027 meeting.
July meeting: ECB to stay on hold while continuing to point to meeting-by-meeting and data-dependent approach
- The ECB is widely expected to maintain the deposit rate at its current level of 2.25% on Thursday, after having raised rates by +25 bps at its previous meeting in June. Prior to that, the ECB had been on hold since June 2025.
- As in previous meetings, the ECB will prefer to keep optionality and limited forward guidance is therefore expected. Given the swings in energy prices observed since the last meeting in June as well as ongoing uncertainty around the US-Iran war, the ECB will want to maintain its data-dependent approach.
- Incoming data have been largely in line with the ECB’s baseline projection published last June. The June inflation print was more benign, growth was somewhat firmer, and energy prices remain elevated after a round trip. New staff projections will be available at the subsequent September meeting.
- The underlying tone at the press conference could point in a hawkish direction. After the re-escalation of the US-Iran war the ECB is likely to point to upside risks to inflation, emphasise its commitment to price stability and likely repeat that June was not an 'insurance hike'. In a recent interview Lagarde said 'I have a general sense of the direction we will take, but the facts will guide us within our monetary policy framework.' Based on the baseline scenario and the assumptions as used in the June staff projections that would imply two more hikes thereby taking the deposit rate to 2.75%.
ECB policy outlook beyond July: market prices +45 bps of rate hikes by year-end 2026, with two hikes fully priced by March 2027. Our view is that the ECB will hike one more time in September
It was encouraging how quickly energy markets normalised after the signing of the memorandum of understanding between the US and Iran on 17 June, with crude oil prices even falling back to pre-war levels of around USD 70 per barrel and European natural gas prices falling 34% from their peak.
This unfortunately did not last long with Trump declaring the ceasefire over on 8 July. Since then, hostilities have resumed on both sides and the oil price is now back to the same level as at the time of the previous ECB meeting (on 11 June) while European natural gas prices are higher. Crude oil prices are currently between the mild and baseline scenarios and European natural gas prices are between the baseline and adverse scenarios.
While we think there are sufficient incentives for both the US and Iran to ultimately find a compromise, the ECB will be more cautious with respect to the indirect effects of higher energy prices on consumer inflation data. Scarcity of refined oil products, owing to lower Chinese and Russian exports, is leading to higher prices for diesel, gasoline and kerosene.
We have revised up our forecast for the ECB deposit rate to 2.50% from 2.25% and currently expect the ECB to hike one more time in September. In addition to the Strait of Hormuz being closed for longer than we expected in June, eurozone growth has been more resilient.
Our year-on-year estimates for headline and core inflation are around 3.0% and 2.5% by year-end. Together with the slow expected return of core inflation to target in the ECB’s staff projections, this will prompt the ECB to hike in September taking the deposit rate to 2.50%.
Note that this is considered to be at the upper end of the neutral range, the level of the deposit rate that is neither stimulating nor restraining economic activity. This still neutral level for the deposit rate, together with decent loan growth data despite tighter bank credit standards, will limit the perceived negative impact of hiking in September.
Growth more resilient in Q2 2026 than expected supported by both hard and survey data. Manufacturing output data, excluding Ireland, for April and May point to a 3.0% annualised growth rate in the second quarter. This is partly driven by stockbuilding due to concerns of future supply disruptions. However, consumer spending is also resilient when considering the shock to real incomes from higher energy prices.
Based on April and May data, retail sales growth is 0.8% annualised for the second quarter relative to the Q1 average. Looking at surveys, we saw an improvement in business confidence in June.
The final composite PMI, a survey-based indicator that combines manufacturing and services activity to gauge the overall pace of private-sector economic growth, rose to 50.0 in June from 48.5 in May. The harder-hit services sector recovered to 49.4 from 47.7. While still at low levels, consumer confidence also improved in June. Further developments will naturally depend on the US-Iran war and the level of energy prices, but the economy has been holding up better than feared.
Why we expect the ECB to be done after one more hike in September
It remains our base case that the US and Iran will reach an agreement that enables a gradual resumption of energy flows through the Strait. Imbalances in energy markets are increasing and inventories are at more critical levels, but we have seen how quickly energy markets can rebalance in the event of a more durable resolution of this conflict. We do note that some risk premium is likely to linger relative to the Brent crude USD 70 per barrel price seen at the beginning of July.
And while it is still early, so far we have seen limited evidence of indirect or second-round effects in eurozone inflation data. The June inflation print was relatively benign coming in below expectations for both headline, at 2.8% year-on-year, and core inflation, at 2.4% year-on-year. This was mainly driven by lower food price inflation at 1.5% year-on-year and lower services inflation at 3.2% year-on-year. For services, the stronger print of the previous month, in May, was distorted by the timing of public holidays.
Labour market eurozone not weak, but neither is it tight. This limits employee bargaining power and thereby the risk of second-round effects taking hold. Employment grew at an annualised rate of 0.3% in Q1 2026 and recent country-level data point to potential for some strengthening in Q2 2026. The ECB wage tracker came in at 2.6% year-on-year in May, the same level as in Q1.
While PMI employment intentions for the eurozone improved to 50.0 in June from 49.0 in May, this was not reflected in the European Commission’s survey of corporates which points to less momentum in employment intentions. Finally, corporate wage-increase expectations also eased to 2.5% year-on-year. This is lower than pre-war levels and could reflect corporate concerns over pricing power.
