ECB's Nagel Warns of Caution as Oil Surge Clouds July Rate Decision

According to CNBC, escalating hostilities between the U.S. and Iran over the Strait of Hormuz have pushed oil prices higher, casting uncertainty over the European Central Bank's interest rate decision on July 22. Bundesbank President and ECB rate setter Joachim Nagel told Reuters that the renewed outbreak of military conflict and the fresh rise in oil prices underscore that the situation remains extremely volatile and the uncertainty is similarly high, advising caution but acting decisively if necessary, and that monetary policy will maintain its vigilant stance. The ECB last month reversed course, hiking by 25 basis points to 2.25% after four rate cuts earlier in 2025 that took the deposit rate from 3% to 2% by mid-June. Headline eurozone inflation eased to an estimated 2.8% in June from a peak of 3.2% in May, despite an 8.7% year-on-year increase in energy costs, as core inflation held at 2.4%. Brent crude September futures traded above $85 per barrel on Wednesday, up sharply from around $70 last week. Policymakers are also conscious that an overly restrictive stance could tip the eurozone into recession after a 0.2% year-on-year contraction in the first quarter of 2026. Market pricing implies roughly a 20% chance of a rate hike next week, with expectations of two more 25 basis point increases by next spring, taking the deposit rate to 2.75%. Austrian central bank chief Martin Kocher told German newspaper Börsen-Zeitung that the bank is paying particular attention to indirect price effects of the war and possible second-round effects, noting that none are visible yet but policy must align with inflation expectations. ING rates strategists wrote that eurozone inflation data will be pivotal for challenging hawkish market positioning, but the peak for European inflation might not be in sight yet, especially if energy prices continue to rise.