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Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 22-23 July 2026

1\. Review of financial, economic and monetary developments and policy options

Ms Schnabel started her presentation with the observation that since the Governing Council’s monetary policy meeting on 10-11 June 2026 financial markets had continued to be driven by the evolving conflict in the Middle East and developments around artificial intelligence (AI).

Oil prices had remained highly sensitive to geopolitical developments. Vessel traffic through the Strait of Hormuz had increased temporarily but remained well below historical norms. Since the latest escalation of the conflict, traffic had declined again, underscoring the persistence of the disruptions to global energy supply chains. These developments had led to pronounced swings in oil markets. Brent crude oil prices had briefly fallen back to pre-war levels following the announcement of a preliminary peace agreement. In spite of the recent rebound, current prices remained well below their recent peaks and below the levels prevailing just ahead of the Governing Council meeting on 10-11 June. By contrast, prices for longer-dated oil futures contracts had remained elevated throughout the short-term oil price volatility. While the futures curve had shifted downwards since June 2026, it remained well above pre-war levels over the entire horizon, pointing to a persistent increase in oil prices with risks remaining tilted to the upside.

Ms Schnabel highlighted the fact that financial market developments had decoupled somewhat from the short-term volatility in oil prices. When oil prices had moved sharply lower, the one-year overnight index swap (OIS) rate one year ahead had adjusted more modestly due to the limited response of inflation compensation over the same horizon. However, inflation compensation, and thus interest rate expectations, had quickly risen again once oil prices had rebounded, surpassing the levels reached at the time of the Governing Council meeting on 10-11 June. One reason for these developments was that oil prices had not been representative of broader energy markets over recent weeks. Crack spreads, i.e. the differences between wholesale petroleum product prices and crude oil prices, often used to estimate refining margins, had been on a steep upward trend in recent weeks, reaching new all-time highs. Tight inventories and constrained refining capacity due to the destruction of refining facilities in the Middle East and in Russia had pushed up petrol and diesel prices. Natural gas prices had also remained significantly above their pre-war levels and stood not far from the peak reached after the outbreak of the war. Risks around future gas prices remained sharply tilted to the upside, which was probably partly related to continued low gas storage levels.

Food prices had also been on an upward trend lately. While fertiliser prices had fully reversed the spike seen after the start of the war, food commodity prices had risen notably since the Governing Council meeting on 10-11 June. One factor might have been weather-related risks, with the latest meteorological forecast expecting with certainty El Niño conditions over the coming months. The recent heatwaves in Europe were likely to put additional pressure on food production and prices. Another factor contributing to persistently higher expectations for inflation, and hence for interest rates, was the improvement in the macroeconomic outlook over recent weeks. For the euro area, economic data releases had come into line with or even been above market expectations in recent months. The resilient macroeconomic environment had been one key factor supporting investor risk sentiment, supported by continued optimism around AI.

Looking at the market-based inflation outlook, inflation fixings (excluding tobacco) had edged down over the very near term but had remained broadly unchanged thereafter compared with their levels at the time of the Governing Council meeting on 10-11 June. From mid-2027 onwards, however, inflation fixings had moved up and remained visibly above 2% over the medium term, implying that the drop in oil prices had not brought relief to the priced path for inflation over the medium term. The balance of risks over the next two years was again noticeably tilted to the upside, while long-term inflation expectations continued to be anchored.

A decomposition of euro area risk-free rates showed that the rise in nominal yields since the onset of the war in the Middle East reflected both higher inflation compensation and higher real rates, with higher inflation compensation dominating over shorter horizons. As regards policy rate expectations, the OIS forward curve in the euro area was close to the curve prevailing at the time of the Governing Council meeting on 10-11 June. Markets continued to expect further policy tightening, with a hike in September 2026 almost fully priced in and an additional hike fully priced in by February 2027. The OIS forward curve remained above median expectations reported in the Survey of Monetary Analysts, with participants continuing to foresee only one further rate hike in 2026. However, the survey only partly reflected the recent re-escalation of the conflict.

In the United States, monetary policy expectations had also remained broadly stable, but with noticeable movements in the inter-meeting period. Following the June 2026 Federal Open Market Committee meeting the federal funds futures curve had moved up markedly before retreating after the release of lower than expected US consumer price index (CPI) data.

The euro had initially depreciated further against the US dollar, following the repricing of expectations for US monetary policy, before reversing part of this move after the weak US CPI data. The euro had remained well below the level prevailing at the beginning of the war in the Middle East against the US dollar. Exchange rate movements since May 2026 had been closely linked to shifts in short-term rate differentials.

Equity markets had continued to march higher, supported by positive earnings expectations. Semiconductor stocks had been the dominant driver of US stock market gains in 2026. In the euro area stock market, gains had instead been dominated by the utilities and energy sector. Recent equity price gains had been boosted by rising earnings expectations rather than by valuations. In the week of 13-17 July, however, technology stocks had experienced a sharp correction, particularly in the United States. The recent fragility in technology stocks could intensify if the revenues of AI companies and returns on AI investment fell short of the high expectations embedded in market prices. Indeed, Chinese AI models had approached the performance of US frontier models, while operating at significantly lower costs, thus intensifying competition and putting pressure on the profits of US firms.

A reassessment of US tech sector valuations could also have implications for corporate credit markets. Spreads on corporate bonds in the US technology sector had recently decoupled from spreads on non-tech investment-grade US non-financial corporate bonds. This reflected rising risk compensation demanded by investors in the wake of the record bond issuance by hyperscalers. In the euro area, by contrast, spreads on investment-grade bonds in the technology sector had remained broadly stable. More generally, there had been increasing concern about rising leverage related to technology and AI, and the expansion of leveraged investment products might amplify possible market corrections.

Ms Schnabel then turned to money markets. There had been a gradual upward drift in general collateral repo rates relative to the deposit facility rate over recent quarters, pointing to less abundant excess liquidity. The June 2026 quarter-end had generated a pronounced upward spike in general collateral repo rates, and afterwards repo rates had not fully returned to pre-quarter-end levels. The rate increase had been widespread across collateral jurisdictions and market participants, indicating a gradual return to more balanced liquidity conditions, in line with the objectives of the operational framework for implementing monetary policy. Overall repo markets continued to function smoothly.

The global environment and economic and monetary developments in the euro area

Mr Lane then went through the latest economic, monetary and financial developments in the global economy and the euro area. Starting with developments in energy commodity prices, oil prices stood 6% lower than at the time of the June Governing Council meeting, at USD 89 per barrel. With the recent reversal, the latest oil futures curve now lay close to the assumptions for the milder scenario contained in the June projections, in the near term, and between the June baseline scenario and the milder scenario from the end of 2026 onwards. Renewed geopolitical tensions, low gas storage levels in Europe, and resilient gas demand from Asian countries had pushed European gas prices up by 16% since the June Governing Council meeting. The divergence between oil and gas price dynamics in part reflected the less elastic gas demand from Asian countries. As a result, the latest gas futures curve stood above the assumptions for the June baseline until the end of 2027. Owing to these price movements, the synthetic energy commodity price index (SECPI), a weighted average of oil and gas prices with a greater weight for oil, had increased by 2% since the June Governing Council meeting. The futures curve of this index was now very close to the June baseline assumptions. Moreover, the 95th, 75th and 25th percentiles of the option-implied densities of the latest energy price futures broadly replicated the severe, adverse and milder scenarios for energy price developments from the June staff projections. Mr Lane noted that overall the outlook for energy prices, while highly volatile, currently stood close to the baseline of the June Eurosystem staff projections and well above the levels recorded prior to the start of the conflict in the Middle East. Risks remained to the upside for inflation and to the downside for growth.

Turning to inflation in the euro area, headline inflation, as measured by the Harmonised index of Consumer Prices (HICP), had decreased to 2.8% in June, from 3.2% in May. Headline inflation in the second quarter of 2026 had been 0.2 percentage points below the June projections. Energy inflation had declined to 8.5%, from 10.8%. Non-energy inflation had also surprised to the downside, easing to 2.2%, from 2.4% in June, and standing 0.1 percentage points below the June projections in the second quarter of 2026. Food inflation had declined to 1.5%, from 1.9%, and stood 0.4 percentage point below the June projections in the second quarter of 2026. Core inflation (HICP inflation excluding energy and food) had edged down to 2.4% in June, from 2.6% in May, reflecting a 0.2 percentage point reduction in goods inflation to 0.7% and a 0.3 percentage point decrease in services inflation to 3.2%.

The energy shock continued to feed into higher prices. Compared with before the conflict, firms faced higher input costs and reported an increase in expected selling prices. Meanwhile, supply chain pressures generally remained stronger than before the conflict. At the same time, input prices, selling price expectations and supply chain pressures had moderated according to the latest survey responses, which had in part been collected after the signing of the US-Iran Memorandum of Understanding but before the latest renewed escalation of the conflict. Developments in underlying inflation had remained contained so far: both exclusion-based and model-based measures of underlying inflation had eased in June. The Persistent and Common Component of Inflation for headline inflation had declined by 0.2 percentage points to 2.1% in June. The Indicator of Core by Aggregating Regimes of Inflation Sub-components (ICARIS), which captured the breadth of inflation pressures, suggested that indirect effects from the energy shock were not broad-based as yet.

However, it would take time for the indirect and second-round effects from the energy shock to emerge, and the response of domestic prices would ultimately depend on the joint dynamics of profits and wages. Adjusting for special factors in Ireland, profit margins had been broadly stable in the first quarter, while forward-looking indicators pointed to downward pressures on profit margins in the second quarter. The ECB wage tracker pointed to moderate wage pressures in the near term, with negotiated wage growth with unsmoothed one-off payments averaging 2.6% this year and 2.7% in the first quarter of 2027. The latest results of surveys on wage expectations also suggested that labour cost pressures were edging lower. The limited scale of the fiscal response to the energy shock to date should also help to contain second-round effects.