The ECB Holds Rates. Assessing the War's Impact.

Having delivered its first rate hike in roughly three years in June, the ECB held all three key rates steady at its July 23 Governing Council meeting (deposit facility 2.25%). Rather than proceeding to back-to-back hikes, it took a pause. It is a "buy-time" hold, intended to gauge how the Iran war is affecting the euro-area economy and inflation.

Cooling prices provided a tailwind. June HICP (consumer prices) came in at +2.8% year on year, easing from +3.2% in May, and energy-price gains also began to soften. President Lagarde reiterated, as before, that future decisions will be "made meeting by meeting and based on the data, with no pre-commitment to a particular rate path." Amid uncertainty in which upside inflation risks and downside growth risks coexist, the Bank is taking a cautious wait-and-see stance.

The ECB long maintained negative rates (−0.50%), but in response to post-Covid inflation it raised rates rapidly from July 2022. The deposit rate peaked at 4.00% in September 2023. It then fell to 2.00% through eight cuts, before reversing higher to 2.25% with June's first hike in roughly three years. This July, the ECB held there.

In just over a year, the rate raced from negative territory to above 4%, then edged gradually back down, before turning up again in June. The ECB regards 2.00% as "a neutral level that neither heats nor cools the economy," and it stepped one notch above that in response to renewed inflation. The July hold signals that policy has entered a phase of standing still at that level to assess conditions.

June HICP (Harmonised Index of Consumer Prices) rose +2.8% year on year, easing from +3.2% in May. The main driver was a moderation in energy-price gains to +8.7%. Yet services inflation, which reflects wages, stayed high at +3.2%, leaving inflation still above the 2% target. That is the backdrop to the ECB's decision to hold and wait.

Inflation is gradually declining toward the target, but the stickiness of services lingers. ECB staff projections (as of June) see inflation falling to 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028. The new projections due at the September meeting will be the next clue to whether cuts resume or another hike follows.

Whereas the central banks of Japan and the US mainly move a single rate, the ECB has three key rates. Among them, the "deposit facility rate (2.25%)"—the rate banks earn when parking funds at the ECB—is currently the de facto policy rate (the benchmark that steers market rates).

The marginal lending facility (2.65%) is the ceiling rate at which banks borrow overnight from the ECB, while the main refinancing operations rate (2.40%) sits in between. These three rates, raised by 0.25% in June, were held in July. Together they form a corridor that sets the "ceiling, middle and floor" for market rates.

Monetary policy is set by the Governing Council, which meets roughly every six weeks. Attending are 27 people—the ECB's 6 Executive Board members and the governors of the 21 euro-area countries. Voting rights, however, are capped at 21 votes, with governors voting on a monthly rotation (Bulgaria joined in January 2026, bringing the total to 21 countries).

The governors' rotation is weighted by economic size. The top five countries—Germany, France, Italy, Spain and the Netherlands—share 4 votes, while the other 16 countries share 11 votes, each rotating monthly. Everyone joins the discussion, and decisions are largely reached by a near-unanimous consensus.

Monetary-policy Council meetings are held eight times a year, roughly every six weeks. At the March, June, September and December meetings, ECB staff projections for the economy and prices are published, drawing particular market attention. The most recent was July 23. The next is September 10 (projections released).

Decisions are announced at 14:15 Central European Time, with the President's press conference beginning at 14:45. At the September 10 meeting, new staff economic projections will be published. If inflation eases further, the debate over resuming cuts could get moving; conversely, if the war reignites energy prices, the debate over an additional hike could take hold.

The euro is the world's second currency after the dollar. ECB rates heavily influence the euro exchange rate. This hold was largely priced in, and the euro-dollar reaction was limited. Against Japan, higher euro-area rates continue to underpin a backdrop of a stronger euro and weaker yen.