MNI SOURCES: ECB September Meeting 'Live' Despite Iran Deal

The fall in oil and gas prices following news of a deal to reopen the Strait of Hormuz is bringing the European Central Bank closer to its “milder scenario,” Eurosystem sources told MNI, adding that a pause in the July meeting is now very likely but that another hike looks set to be discussed in September given early signs of indirect feedthrough to prices from dearer energy.

With Brent crude now below USD80 a barrel and natural gas futures also sliding, energy prices are below those assumed in the milder scenario, which sees HICP inflation rising to 2.9% this year before falling back slightly below the 2% target in 2027, officials noted. But, despite the fact that second-round effects from dearer energy have yet to materialise, several sources said that they still see the September meeting as live.

“Even with the [Iran] agreement, inflation is already here,” one source said, pointing in particular to the acceleration in services inflation, which hit 3.5% in May, though adding that a confirmed Iran peace deal and a potential quick recovery in LNG production could have a positive effect on expectations. “Even if this agreement holds, it will take a while to recover and return to previous prices.”

SCENARIO ASSUMPTIONS

While uncertainty is still elevated, with questions both over the durability of peace in the Persian Gulf and over the speed at which energy supplies will return to normal, and while the eurozone economy is barely growing, with composite PMI in contraction territory, several officials told MNI they see one more hike this year as the most likely outcome. One source noted that the ECB’s scenarios had assumed further tightening, though the market assumptions they incorporated of three rate hikes in 2026 are now outdated.

“I understand that the numbers presented are only projections on assumptions, but they are what we have,” the source said. “I think under the mild scenario -- and as of now I'd guess we are between mild and baseline -- we are probably less likely to have to even consider what would have been a third 25-basis-point hike. However, personally I'd say at a constant state, we will still likely hike just once more in September.”

While second-round inflation effects are not visible so far, there are some spillovers from more expensive energy into prices, the source said.

“If the energy futures prices do slope significantly lower in the next few months, we may be able to stay on hold in September … But we probably do now have to factor in some type of risk factor on energy prices that even a fully signed deal in a few months could easily fall apart."

June’s 25-basis-point hike in the Deposit Rate to 2.25% still leaves the ECB on the upper end of its estimate of the neutral range of interest rates, the official added, playing down the risk of a policy mistake. (See MNI ECB WATCH: ECB Hikes, Sticks With Meeting-By-Meeting)

“We are still in that range, so it’s not as if we have turned to an aggressive restrictive rate regime.”

SECOND-ROUND RISKS

No clear second-round effects from higher energy prices have shown up yet, but indirect effects are already visible, another source said, adding that firms’ pricing expectations are also tilted to the upside.

At the same time, there are fears among officials that ECB projections might be too optimistic on the growth side.(See MNI SOURCES: Growth Outlook Darkens As ECB Heads For June Hike)

“Keep an eye on the labour market. We have to watch out for weakening because it could give us an important signal,” one source said. But, he added: “September is super live. We will not take risks. We are in fine-tuning territory if this [Iran deal] holds.”

Another source agreed that expectations for growth may be overblown, despite challenging  inflationary conditions, but stressed that the ECB would persist with its data-dependent, meeting-by-meeting approach.

“The outlook remains tough,” the source said. “We really will go where the data takes us.”

An ECB spokesperson declined to comment.