Highlights: The ECB kept interest rates unchanged, as expected, but President Christine Lagarde adopted a cautious tone, highlighting that renewed energy price pressures have increased uncertainty over the inflation outlook. While disinflation continues and the eurozone economy has shown resilience, policymakers remain focused on the risk of second-round inflation effects and are likely to remain data-dependent. Amid renewed energy volatility, we have now revised our forecast and expect a 25bp hike at the 2026 September meeting. We maintain our selectively cautious investment stance in Europe with a preference for quality fixed income and structural equity opportunities.

• The ECB left all three policy rates unchanged, in line with expectations, but the tone of the meeting was more cautious than markets had anticipated. President Lagarde emphasised that while inflation has continued to moderate, the recent rebound in energy prices has increased uncertainty around the inflation outlook
• Headline inflation eased to 2.8 per cent in June, with underlying price pressures continuing to cool. However, the ECB believes the full inflationary impact of the energy shock has yet to play out in the economy. Policymakers remain particularly focused on whether higher energy costs begin feeding into wages, services inflation and broader inflation expectations
• Despite the improving inflation backdrop, the Governing Council reiterated that policy decisions will remain strictly data-dependent and taken on a meeting-by-meeting basis. President Lagarde avoided giving any indication of the future policy path, signalling that policymakers want greater confidence that inflation will return sustainably to target
• As Lagarde spoke, one-month oil returned to USD 100/b and six-month gas was close to its March highs. So, we now think the ECB will hike rate by 25bp at its next meeting on 10 September and then stay on hold until September 2027 when we see a 25bp cut
• We continue to favour a selectively cautious approach to Europe. We see opportunities in structural growth themes and sectors benefiting from policy support. Also, we maintain a preference for quality EUR fixed income and a disciplined, valuation-conscious approach to European equities within diversified portfolios