SINTRA, Portugal, June 30 - The recent and unexpectedly rapid fall in energy prices has reduced the immediacy for the European Central Bank to raise interest rates again at its next meeting, four sources with direct knowledge of internal discussions said. The sources stressed that, despite the easing of pressure, the argument for at least a modest additional increase later this year remains intact.
Policymakers moved in June to lift borrowing costs preemptively as a possible spike in oil prices tied to the Iran-related conflict risked feeding into inflation expectations. Since then, however, oil markets have calmed more quickly than many participants had anticipated. The sources said they were surprised by how fast prices fell and noted that futures across several key time horizons now sit under the ECB’s so-called milder inflation scenario.
Several factors underpin that decline. Anticipated shortages - for jet fuel and other fuel products - have not materialised, and in some cases supply has expanded more than forecast. The sources singled out increased production from certain producers, particularly Saudi Arabia, which has helped keep the market well supplied. At the same time, China appears to have consumed less oil than earlier predictions suggested, likely because it substituted oil with other energy sources more aggressively than forecasters expected. Taken together, the sources said, those elements support the view that energy prices can retrace rapidly once supply conditions re-establish normal patterns.
Market behaviour over the weekend added to the sense that normalisation is under way. Oil did not register a strong price reaction to a recent escalation in the Iran-U.S. conflict, according to the sources, a sign that the market’s sensitivity to geopolitical developments has eased.
Policy timing and the data hinge
For now, the balance of opinion inside the ECB favours postponing the next move until September, the sources said. But they added that upcoming inflation readings - in particular the June headline figure due on Wednesday - will carry significant weight. If the headline rate falls back from 3.2% as financial markets are currently pricing, those sources argued that waiting until September would be the preferable course of action. Conversely, a disappointing or stronger-than-expected print would strengthen the case for a swift follow-up hike as soon as July.
Falling consumer and business price expectations have also been cited by the sources as a reason to give markets and data additional time before tightening policy further. The ECB’s official target remains 2% inflation; its baseline projection does not show inflation returning to that target until the second half of next year, while its milder scenario puts inflation well below 2% by mid-2027.
Financial markets at present attribute roughly a one-in-three probability to a July rate increase and do not fully discount the next hike until October, the sources said.
Second-round effects and risk assessment
Some ECB officials have argued that a follow-up increase could guard against the risk that any oil-price resurgence seeps into broader wage and price-setting behaviour, creating second-round inflation effects. The sources noted that those second-round impacts have so far been minimal, even though standard economic logic suggests some such effects could eventually emerge. Policymakers will weigh that potential against the latest market and inflation signals ahead of their next meeting on July 23.
The sources declined to comment further. The policy debate, they emphasised, remains data dependent: a clear sign of inflation re-accelerating would tilt the balance toward an earlier move, while continued disinflationary signals would argue for patience.