The ECB Is on Hold — But It Has Left the Door Open to a September Hike

The European Central Bank’s Governing Council kept all three key rates unchanged on July 23: the deposit facility at 2.25%, main refinancing operations at 2.40%, and the marginal lending facility at 2.65%. The council reiterated a meeting-by-meeting, data-dependent approach — and pointedly did not rule out a hike in September.

That last part is the story. A central bank that has spent two years cutting is now publicly unwilling to close off tightening, and it has one cause: energy.

A central bank on hold and a market pricing hikes

Renewed strength in crude following Middle East tensions raised inflation concerns across the eurozone through July, with Brent crossing $100 on July 23 — the very day of the decision.

The ECB’s own business contact survey, conducted mainly between June 22 and July 1, found selling prices rising more quickly in the second quarter, explicitly reflecting pass-through from higher oil prices caused by the conflict.

That is the sentence that should concern anyone modelling European rates. Not oil prices rising — oil prices already reaching firms’ selling prices. Pass-through is what turns an energy shock into an inflation problem a central bank has to answer for.

The complication nobody has priced yet

Crude has since fallen back hard, to roughly $85 by July 28, after Washington paused strikes and Iran opened talks on the Strait of Hormuz.

That creates an genuinely awkward question for September. Pass-through, once it starts, is famously asymmetric: firms raise prices quickly when input costs rise and lower them slowly, if at all, when input costs fall. If eurozone selling prices have already absorbed $100 oil, a retreat to $85 does not automatically unwind them. The ECB could end up tightening into an inflation print driven by a shock that no longer exists in the spot market.

The rest of the survey is a growth warning

The same contacts described activity growing moderately in the second quarter with similar momentum expected in the third, but with two soft spots:

• Employment dynamics were subdued, with many firms in cost-cutting mode.
• The Middle East war was weighing on consumer spending, though some firms benefited from reduced competition and precautionary stockbuilding.

Put together: modest growth, weak hiring, rising selling prices. That is the shape of stagflation, and it is the hardest environment a central bank can face, because the two halves of the mandate point in opposite directions.

Why this matters to Canadian investors

More than most people assume:

• International equity allocations. Standard Canadian portfolio templates put 15–25% in developed international equity, which is dominated by European large caps. European banks are direct beneficiaries of a higher-for-longer path; European industrials and consumer names are not.
• Currency layering. A Canadian holding a CAD-listed European equity ETF carries two currency exposures — CAD/EUR and, for unhedged funds, the underlying’s currency mix. With the ECB, the Fed and the Bank of Canada moving on different timelines, that exposure is not incidental.
• The same oil variable, opposite signs. Canada is an energy exporter and the eurozone is an energy importer. The identical oil price is a terms-of-trade gain for one and a tax on the other, which argues for treating them as genuinely distinct exposures rather than a single “developed market equity” bucket. If your international fund is one line in your account, the portfolio tracker will show what it actually contains.

Frequently asked questions

Did the ECB raise rates in July 2026?
No. All three key rates were held on July 23 — deposit facility 2.25%, main refinancing operations 2.40%, marginal lending facility 2.65%.

Is the ECB going to hike in September?
It has not committed either way. The council explicitly left the option open, citing Middle East tensions and energy prices, while restating that decisions are made meeting by meeting.

What does pass-through mean?
The point at which higher input costs stop being absorbed by company margins and start being charged to customers. Once that happens, an energy shock becomes broad inflation, and looking through it stops being available as a policy option.

Bottom line

The ECB did nothing in July, which is exactly why the September language is significant. The council has concluded that an oil shock reaching corporate selling prices may eventually require an answer — and it is keeping that answer available even as the oil price falls.