Doha, Qatar: Qatar National Bank (QNB) expects the need for further monetary policy tightening by the European Central Bank (ECB) to diminish, as the risks of energy price shocks spilling over into inflation have eased, the growth outlook for the Euro Area has weakened, and ECB policymakers have shifted toward a wait-and-see approach, assessing incoming data before taking any further steps on interest rates.
In its weekly commentary, QNB explained that unless a new inflationary shock emerges or underlying price pressures prove unexpectedly persistent, the June rate increase is likely to mark the end of the ECB’s tightening cycle, with policy rates expected to remain unchanged over the remainder of the year.
At the beginning of the year, the European Central Bank (ECB) appeared set to keep interest rates unchanged throughout 2026. After a successful disinflation process, inflation had fallen close to the ECB’s 2% target, while the deposit rate stood at 2%, a level broadly considered neutral.
QNB said the escalation of the US-Iran conflict abruptly changed this outlook, as severe supply disruptions and constraints on shipping through the Strait of Hormuz triggered a sharp increase in oil and natural gas prices, pushing inflation above target once again.
Policymakers became increasingly concerned that higher energy costs could spill over into the prices of other goods and services, making inflation more persistent through second-round effects.
The Euro Area is particularly sensitive to natural gas prices, as gas not only constitutes a major share of energy imports, but also acts as a key price-setting factor in electricity markets.
Against this backdrop, the ECB raised its deposit rate by 25 basis points in June, to prevent what was initially viewed as a temporary energy shock from becoming a broader inflation problem.
QNB said monetary policy has so far succeeded in containing these effects, unless a further and considerable spike in energy prices should prove more persistent.
The bank discussed three key factors supporting this assessment.
First, the inflation risks that prompted the June rate hike have eased.
QNB noted that, despite the ongoing conflict between the US and Iran, recent inflation data suggest that higher energy costs are not feeding broadly into the economy.
Both headline and core inflation surprised to the downside in June, while wage growth continues to moderate, limiting the risk of second-round effects.
Moreover, euro inflation swap rates - a market-based measure of investors’ inflation expectations - have fallen below the ECB’s 2% target over the next year.
Taken together, these developments suggest that the inflation shock is likely to prove temporary, substantially weakening the case for further monetary tightening.
Second, the weakening growth outlook for the Euro Area reinforces the case for no further increases in policy rates.
Business activity has remained subdued, with the composite Purchasing Managers' Index (PMI), which combines the manufacturing and services sectors, staying below the 50-point threshold that separates expansion from contraction for the past three months.
QNB noted that this weakness has prompted analysts to revise down their growth outlook, with consensus forecasts for real GDP growth this year declining from 1.2% before the US-Iran conflict to 0.6%.
Slower economic growth is also likely to reduce underlying inflationary pressures by dampening demand across the economy.
Against this backdrop, additional monetary tightening would risk weighing unnecessarily on an already fragile economy.
Third, the stance of monetary policymakers points to a growing preference for keeping policy rates unchanged.
QNB said recent ECB communication suggests that policymakers are becoming more comfortable with leaving interest rates unchanged.
At the June meeting, the Governing Council emphasized that it would continue to follow a data-dependent and meeting-by-meeting approach, without pre-committing to a specific path for policy rates.
QNB noted that this message was reinforced at the ECB’s annual Forum on Central Banking, held in Sintra, Portugal, where central bankers, academics, and financial market participants gather each year to discuss the global economic outlook and monetary policy challenges.
There, President Lagarde noted that risks to inflation and growth had become more broadly balanced, while other Governing Council members also indicated that a wait-and-see approach was appropriate.
Some members expressed openness to keeping policy rates unchanged if incoming data continue to confirm that inflation risks are receding.
In light of these remarks, QNB concluded that the Governing Council is increasingly focused on assessing incoming data and developments in inflation and growth, rather than preparing for another near-term increase in policy rates.
