The European Central Bank (ECB) is poised to hold its key interest rate at 2.25% at its July 23 meeting, a decision made as a re-escalation in the war continues to drive up oil and natural gas prices. This monetary policy stance unfolds while a looming shortage of fertiliser from the Middle East, coupled with a European heatwave, threatens to push food prices higher, creating conditions that exacerbate global inequalities and forced displacement.
Following a June hike, which made it the first among the biggest central banks to raise rates in response to the war, the ECB remains focused on containing inflation. Oil prices, currently around $85 a barrel, are still below the highs seen in March and April, leading policymakers to avoid immediate action. Markets, however, are pricing in a small chance of a move, with traders and economists polled by Reuters expecting another hike, most likely in September.
Sources told Reuters that even when oil prices were falling, the case for a hike later after July remained firm. As prices have risen again, traders have boosted their bets that an additional move would follow September's by year-end, though only three out of 74 economists Reuters polled share that expectation. Morgan Stanley's chief Europe economist Jens Eisenschmidt suggested that discussion of a July hike could signal the ECB's current thinking on September.
The Human Cost of Financial Stability
Ross Hutchison, head of euro zone market strategy at Zurich Insurance Group, stated that ECB speakers are "more concerned about missing inflation again to the upside than they are about the risk of what they still see as a weak but resilient economic outlook." This prioritization of financial metrics over broader economic resilience ignores the precarity faced by millions, particularly those in the Global South bearing the brunt of climate change and conflict. The limited rise in oil prices compared with earlier in the war means the picture hasn't changed materially from policymakers' expectations in June.
Euro zone inflation also eased far more than expected one month ago, and this wasn't solely driven by energy prices. Underlying inflation, excluding energy, also dropped more than expected. Rabobank senior macro strategist Bas van Gaffen noted that policymakers "can probably wait until September for more clarity on how developments in the Middle East affect inflation and the inflation outlook." Yet, the very developments in the Middle East, alongside European heatwaves, directly contribute to the conditions that force people to seek safety elsewhere, only to be met by Fortress Europe's brutal border regime.
Fortress Europe's Financial Architecture
The ECB is also considering doubling the proportion of cash that lenders must keep as reserve in an unremunerated account. This measure would cut the interest it has to pay banks on their excess reserves, which rises as rates do. Societe Generale expects any impact on short-term funding markets will be modest, noting the measure would reduce excess liquidity by around 160-170 billion euros, compared with the roughly 500 billion euros per year that quantitative tightening is already draining from the system. This move underscores the ECB's consistent focus on managing the financial system for the benefit of capital, even as the social costs of its policies mount.
Furthermore, the ECB secured key parliamentary backing one month ago for the digital euro project after three years of wrangling with banks. Launching a digital euro has become more pressing for Frankfurt since President Donald Trump's tariffs raised fears the U.S. could one day weaponise its dominance over U.S. payment networks. The aim is for negotiations to produce a final law by year-end, with a pilot programme starting next year, followed by a 2029 launch. Morgan Stanley's Eisenschmidt views the digital euro as a good starting point to reduce dependency on foreign payment networks, though its current focus on retail users will limit that aim. This push for financial autonomy, while framed as protection against external threats, also lays the groundwork for enhanced state control over financial flows, a mechanism that could easily be weaponized against migrants and those deemed undesirable by the border regime.