The situation in the Middle East escalates and reignites inflation concerns! The European Central Bank remains unchanged as scheduled, September becoming a key window for rate hikes.

The European Central Bank on Thursday kept interest rates unchanged, and will wait for further economic data to determine whether the upward pressure on prices caused by the Iran conflict requires further tightening of monetary policy. The ECB kept the deposit facility rate unchanged at 2.25%, in line with market expectations. Economists and investors expect that after the rate hike in June, the ECB may raise rates by another 25 basis points in September. The ECB reiterated that it will not preset the policy path, but will take action based on the latest economic data at each meeting. In a statement on Thursday, the ECB said, "Uncertainty remains high, and the inflation effects of energy shocks have not yet fully materialized. Therefore, the Governing Council is closely monitoring the intensity and duration of the shocks, as well as their indirect and second-round effects." Policymakers reiterated that the ECB has sufficient policy tools to deal with the current complex situation. After the rate decision was announced, European bond prices showed little movement, with the yield on the 10-year German bond rising by 2 basis points to 3.19%. Earlier, due to concerns about inflation exacerbated by soaring oil and gas prices, the yield had briefly touched 3.21%, the highest level since 2011. Expectations for future interest rate trends also remained stable. Swaps trading showed that the ECB's 25 basis point rate hike in September is almost certain, with the possibility of another hike before the end of the year also reaching almost 100%. The euro remained on a downward trend against the dollar, falling by 0.2% to $1.1392. In June of this year, the ECB raised its benchmark rate by 25 basis points, marking the first rate hike in nearly three years. This move also made the ECB the first major central bank among the G7 countries to raise rates since the outbreak of the Iran war. The rate hike has sparked discussion in the market about whether the ECB is repeating the mistakes of rate hikes in 2008 and 2011, when premature tightening of monetary policy led to an economic slowdown. In June, the ECB warned that inflation triggered by the Iran war had spread beyond the energy sector, but the economy as a whole remained resilient. Now, policymakers are weighing whether further tightening measures are needed. Some ECB officials had believed in early July that peace talks between the US and Iran could limit the impact of the war on consumer prices in the euro area. But as tensions in the Strait of Hormuz escalate again and global oil prices approach $100 per barrel, inflation concerns are rising again. ECB President Lagarde held a press conference after the rate decision meeting on Thursday. She said that energy inflation could keep inflation well above target levels until the first half of 2027, with the conflict being a major source of uncertainty. Lagarde reiterated once again that the ECB will not provide any forward guidance. It is widely believed in the market that if a rate hike is necessary in the future, the September rate decision meeting will be the appropriate window for implementing the measure. By then, more inflation data, business sentiment surveys, and other reports will be released, providing a basis for policy adjustments.