Expectations for ECB to raise interest rates in September increase
[European Central Bank is expected to raise interest rates in September] The European Central Bank will hold its latest interest rate meeting on July 23. Although all parties are expected to keep interest rates unchanged this time, because the European Central Bank was the first among developed economies to raise interest rates in June, its tightening signal and pace of monetary policy have received widespread attention amid continued energy shocks, extreme high temperatures and grim economic prospects.
The European Central Bank will hold its latest interest rate meeting on July 23. Although all parties are expected to keep interest rates unchanged this time, because the European Central Bank was the first among developed economies to raise interest rates in June, its tightening signal and pace of monetary policy have received widespread attention amid continued energy shocks, extreme high temperatures and grim economic prospects. A Reuters survey released on July 16 showed that all 74 economists surveyed expected the European Central Bank to keep the deposit mechanism interest rate unchanged at 2.25% at the July 23 meeting. 70% of the respondents (52 people) expect that the European Central Bank will raise interest rates by another 25 basis points at the September meeting, a further increase from about 60% in the June survey. Morgan Stanley analysts also judged in a research report that the economic data released since the June meeting put the European Central Bank between the moderate scenario and the baseline scenario. Recent speeches by ECB officials also confirmed the general expectation of keeping the policy unchanged in July. The general expectations from all walks of life are based on the judgment of the inflation outlook in the euro area. The latest data from Eurostat show that due to the accelerated rise in service industry prices and continued high energy costs, the euro zone inflation rate rose to 3.2% in May, higher than 3.0% in April; although preliminary data in June fell to 2.8%, it was still well above the European Central Bank's medium-term target of 2%. The core inflation rate rose to 2.5% in May, and service sector inflation was as high as 3.5%. ECB forecasts show that the overall inflation rate in the euro area is expected to reach 3.0% in 2026, fall to 2.3% in 2027, and only fall back to the 2.0% target level in 2028. European Central Bank President Lagarde recently publicly stated that when inflation expectations rise, core inflation rates rise simultaneously, and the return to the 2% target is postponed until the end of 2028, the decision to raise interest rates is "obvious." She also specifically explained that this decision was based on the data she saw and was safe in all modeling scenarios. Lagarde also proposed a new model of policy communication that would “shelve forward guidance and shift to framework guidance.” She said that at a time when economic uncertainty is high, forward guidance on complex situations has lost its value, and instead is guided by three criteria: inflation prospects, potential inflation dynamics and the strength of monetary policy transmission. Nagel, President of the Bundesbank and Governing Council Member of the European Central Bank, recently stated that the resumption of conflicts in the Middle East and the renewed rise in oil prices have highlighted the "extreme volatility" of the situation. "We should respond cautiously, but we must act decisively when necessary." Public data shows that 60% of the energy in the Eurozone relies on imports and is extremely sensitive to fluctuations in international oil prices. Due to the complex economic situation, all parties are still divided on whether to raise interest rates in September. Chris Schikulner, head of economic research at Daiwa Capital Markets, believes that even without the latest developments in the Strait of Hormuz, the European Central Bank "would have needed to raise interest rates." Simon Wells, chief European economist at HSBC, pointed out that if oil prices are at $90 at the September meeting and the outlook is highly uncertain, raising interest rates again "may be a prudent move." Alain Toure, head of European macro research at Natixis, warned that given the fragile growth momentum, one needs to be "very cautious" about raising interest rates. High temperatures exacerbate the spread of energy risks Since June, persistent heat waves have swept across many European countries. The temperature in some areas of France reached as high as 44 degrees Celsius. The UK, Spain, Germany and other countries have set new records for the highest temperatures in June. Nearly 200 million people are exposed to high temperatures above 35 degrees Celsius. This heat wave is having an all-round impact on Europe's power system and industrial production. High temperatures have a particularly severe impact on energy systems. French grid operator RTE said that for every 1 degree Celsius increase in temperature, electricity consumption will increase by 1 million kilowatts. French electricity group EDF disclosed that four nuclear power plants were forced to shut down or reduce power due to cooling water temperature restrictions, and more than 4 million kilowatts of nuclear power installed capacity was reduced, accounting for about 6% of the country's total installed capacity. Under the imbalance of supply and demand, the price of electricity in Germany soared from 86 euros per megawatt hour to 566 euros at noon, and the price of electricity in France climbed to more than 268 euros per megawatt hour, the highest since August 2023. In Italy, which also continues to experience hot weather, Nico Gronchi, president of the country's Federation of Small and Medium Enterprises, said that without structural intervention, climate change will weaken Italy's economic competitiveness.
The Italian newspaper Corriere della Sera used data from the Federation of Small and Medium Enterprises to analyze the impact that extreme hot weather may have on the Italian economy, saying that new investment expenditures such as installing more efficient air conditioning systems, photovoltaic equipment, shading facilities and building energy-saving renovations are expected to reach 2 billion to 4 billion euros per year, and related energy expenditures are expected to be 2 billion to 3 billion euros per year. At the same time, losses due to lower productivity are estimated at 1.5 billion to 3 billion euros. In addition, in fields such as construction, agriculture, and logistics that are severely affected by extreme hot weather, operating income losses are expected to be 1 billion to 2 billion euros per year. High temperature weather also affects people's shopping, travel and consumption patterns, while increasing additional expenditures for households and businesses to deal with high temperature weather. Soaring electricity prices and rising energy import costs due to conflicts in the Middle East have put resonant pressure on the European economy. Since the expansion of the US-Israel-Iraq war at the end of February 2026, EU member states have paid more than 50 billion euros in additional costs for imported oil and natural gas. This burden is systematically dragging down economic activity through production cost transmission and residents' purchasing power. It is estimated that the net outflow of residents' income in the Eurozone due to rising energy import prices throughout the year is approximately equivalent to 1 percentage point of regional GDP. Inflation stickiness will significantly affect the pace of interest rate hikes by the European Central Bank. Economic prospects face severe challenges Currently, the core dilemma facing the European Central Bank is the difficult balance between curbing energy-driven inflation and avoiding an economic recession. In the first quarter of this year, Eurozone GDP shrank by 0.2% quarter-on-quarter, the first negative growth in more than a year. The International Monetary Fund recently revised its 2026 economic growth forecast for the Eurozone down to 0.9% from the previous 1.1%, marking the second downward revision in a quarter. A Reuters survey predicts that the euro zone's economic growth will be only 0.5% in 2026, which is the fourth consecutive downward revision of the forecast. The continued high energy prices have had a serious impact on residents' consumer confidence. From January to April 2026, the euro zone's retail sales growth rate was only 1.7% year-on-year, significantly lower than the 2.4% for the whole of 2025; the average salary growth in the first quarter was only 2.1% year-on-year, which was significantly lower than the nearly 3.9% growth rate in 2024; the consumer confidence index has been in the negative range for 5 consecutive months. The root causes of economic difficulties among member countries are highly similar. Germany is expected to maintain a weak growth of only 0.7%, and the German manufacturing purchasing managers' index (PMI) has been below the boom-bust line for nine consecutive months; France's economic growth forecast has been adjusted to below 0.6%, and political deadlock has suppressed domestic demand; Italy's economic growth is expected to be only 0.5%, and the proportion of public debt in GDP is expected to exceed that of Greece this year. High temperature weather further intensifies downward pressure on the economy. The agency Allianz Trading estimates that due to the impact of high temperatures from 2026 to 2030, the cumulative GDP losses of major European economies will reach 5% to 7%, including approximately US$240 billion in France, US$147 billion in Italy, and US$131 billion in Germany. The limited implementation space of fiscal policy also casts uncertainty on the euro area economy. The Eurozone's fiscal deficit is expected to expand to 3.3% of GDP in 2026, and the public debt ratio remains at a high of 90.2%. The total scale of temporary support measures introduced by various countries so far only accounts for about 0.1% of regional GDP, which is far lower than the response intensity during 2022. Faced with the dual goals of "anti-inflation" and "maintaining growth", the European Central Bank has no choice but to enter a track of small and multiple interest rate hikes. Under the pressure of energy shock, high temperature test and other pressures, the interest rate meeting on July 23 may end in a dull manner, but the acceleration of the signal and pace of interest rate hikes may be inevitable.
The Italian newspaper Corriere della Sera used data from the Federation of Small and Medium Enterprises to analyze the impact that extreme hot weather may have on the Italian economy, saying that new investment expenditures such as installing more efficient air conditioning systems, photovoltaic equipment, shading facilities and building energy-saving renovations are expected to reach 2 billion to 4 billion euros per year, and related energy expenditures are expected to be 2 billion to 3 billion euros per year. At the same time, losses due to lower productivity are estimated at 1.5 billion to 3 billion euros. In addition, in fields such as construction, agriculture, and logistics that are severely affected by extreme hot weather, operating income losses are expected to be 1 billion to 2 billion euros per year. High temperature weather also affects people's shopping, travel and consumption patterns, while increasing additional expenditures for households and businesses to deal with high temperature weather. Soaring electricity prices and rising energy import costs due to conflicts in the Middle East have put resonant pressure on the European economy. Since the expansion of the US-Israel-Iraq war at the end of February 2026, EU member states have paid more than 50 billion euros in additional costs for imported oil and natural gas. This burden is systematically dragging down economic activity through production cost transmission and residents' purchasing power. It is estimated that the net outflow of residents' income in the Eurozone due to rising energy import prices throughout the year is approximately equivalent to 1 percentage point of regional GDP. Inflation stickiness will significantly affect the pace of interest rate hikes by the European Central Bank. Economic prospects face severe challenges Currently, the core dilemma facing the European Central Bank is the difficult balance between curbing energy-driven inflation and avoiding an economic recession. In the first quarter of this year, Eurozone GDP shrank by 0.2% quarter-on-quarter, the first negative growth in more than a year. The International Monetary Fund recently revised its 2026 economic growth forecast for the Eurozone down to 0.9% from the previous 1.1%, marking the second downward revision in a quarter. A Reuters survey predicts that the euro zone's economic growth will be only 0.5% in 2026, which is the fourth consecutive downward revision of the forecast. The continued high energy prices have had a serious impact on residents' consumer confidence. From January to April 2026, the euro zone's retail sales growth rate was only 1.7% year-on-year, significantly lower than the 2.4% for the whole of 2025; the average salary growth in the first quarter was only 2.1% year-on-year, which was significantly lower than the nearly 3.9% growth rate in 2024; the consumer confidence index has been in the negative range for 5 consecutive months. The root causes of economic difficulties among member countries are highly similar. Germany is expected to maintain a weak growth of only 0.7%, and the German manufacturing purchasing managers' index (PMI) has been below the boom-bust line for nine consecutive months; France's economic growth forecast has been adjusted to below 0.6%, and political deadlock has suppressed domestic demand; Italy's economic growth is expected to be only 0.5%, and the proportion of public debt in GDP is expected to exceed that of Greece this year. High temperature weather further intensifies downward pressure on the economy. The agency Allianz Trading estimates that due to the impact of high temperatures from 2026 to 2030, the cumulative GDP losses of major European economies will reach 5% to 7%, including approximately US$240 billion in France, US$147 billion in Italy, and US$131 billion in Germany. The limited implementation space of fiscal policy also casts uncertainty on the euro area economy. The Eurozone's fiscal deficit is expected to expand to 3.3% of GDP in 2026, and the public debt ratio remains at a high of 90.2%. The total scale of temporary support measures introduced by various countries so far only accounts for about 0.1% of regional GDP, which is far lower than the response intensity during 2022. Faced with the dual goals of "anti-inflation" and "maintaining growth", the European Central Bank has no choice but to enter a track of small and multiple interest rate hikes. Under the pressure of energy shock, high temperature test and other pressures, the interest rate meeting on July 23 may end in a dull manner, but the acceleration of the signal and pace of interest rate hikes may be inevitable.