Overview
Analysts at Barclays anticipate the European Central Bank (ECB) will raise interest rates again at its September policy meeting, marking a second hike this year. The call comes even as headline inflation shows signs of cooling and global oil prices have fallen from earlier peaks, factors that could support a less forceful approach from monetary authorities.
Background on recent policy action
In June the ECB raised borrowing costs for the first time in roughly three years. That move made the bank the first among G7 central banks to react to energy-driven inflationary pressures by tightening policy. At the same meeting, the ECB also lifted its baseline inflation projections for 2026 and 2027 and warned that the joint U.S.-Israeli assault on Iran is "generating inflation pressures."
Barclays' assessment of inflation data
Barclays strategists Silvia Ardagna and Mariano Cena note that consumer price growth in the euro area eased on an annual basis in June. Preliminary Eurostat data show that consumer prices across the 21-member currency area rose 2.8% in the 12 months to June, down from 3.2% in May and below economists' expectations of 3.0%.
Energy remains the largest contributor on an annual basis, but its year-on-year increase slowed to 8.7% in June from 10.8% in May. Brent crude futures have retreated to around pre-war levels after a framework peace deal between the U.S. and Iran was signed last month. Oil had spiked to well above $110 a barrel following the late-February outbreak of conflict, when disruptions around the Strait of Hormuz - a key route for roughly a fifth of the world's oil and liquefied natural gas - helped push prices higher.
Europe was affected by the broader fallout from the conflict, including attacks on important natural gas production facilities in the Gulf, which contributed to the earlier surge in energy costs and fears over a broader inflationary wave.
Outside energy, there were moderating moves in several categories in June. Prices for services, food, alcohol and tobacco rose but at a softer pace. Core inflation, which excludes volatile items such as food and fuel, slowed to 2.4% in June from 2.6% previously, versus a projection of 2.5%.
Signs of pipeline pressure
Despite the easing in headline measures, Barclays cautions that some upstream pressure remains. The strategists highlight indicators of selling price expectations published by the European Commission. "[T]hese indicators remain elevated relative to both their historical averages and pre-war levels, particularly in the manufacturing and retail sectors, suggesting that the cost-push pressures generated by four consecutive months of elevated energy prices are likely to give rise to indirect effects outside the energy complex in the near term," they wrote.
That assessment underpins Barclays' expectation that the ECB may still feel compelled to act again in September, even if the environment has shifted since the mid-year peak in energy-driven inflation.
Comments from ECB leadership
At a central banking forum in Portugal this week, ECB President Christine Lagarde rejected the notion that the June rate increase was merely an insurance move against surging prices. Instead, she framed the June decision as robust across a range of potential inflation scenarios. She warned that the euro area is entering a period of more frequent supply shocks and suggested that the economy's resilience could place monetary policy in an intermediate zone - between shocks that can be looked through and those that require a forceful response. Lagarde also emphasized that the rapid evolution of such shocks means policy needs to be able to adapt quickly.
Barclays notes that Lagarde did not offer a "clear directional signal," and that she characterized risks to both inflation and growth as more balanced. Other members of the ECB's Governing Council have similarly indicated that "all options" remain on the table for forthcoming meetings.
Implications for policy and markets
Barclays' projection for a September hike reflects the tension between decelerating headline inflation and persistent upstream price signals. Falling oil prices and a lower-than-expected CPI print could justify a less aggressive policy stance, but elevated selling price expectations point to potential second-round effects that could push price pressures beyond the energy sector.
Given these dynamics, the ECB faces a choice between pausing its tightening cycle in response to cooler headline data or pressing ahead to preempt indirect inflation pass-through outside energy. Barclays' view is that, despite the recent easing, the balance of evidence still supports another rate increase in September.
Summary
Barclays expects the ECB to raise rates again at its September meeting. Although headline inflation has eased and oil prices have fallen back, indicators of selling price expectations remain elevated and could generate broader inflationary effects, keeping policy makers alert to the need for further tightening.