Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.
The ECB’s decision to leave interest rates unchanged was expected, following inflation falling in June for the first time this year. After raising interest rates last month, the ECB has shown patience while they assess whether higher borrowing costs are effectively containing inflation without imposing undue strain on the Eurozone’s fragile economy.
This is a key balancing act for the ECB. The OECD’s Economic Outlook in June forecast growth in the Eurozone to slow to only 0.8% in 2026, with the expectation that fiscal policy will tighten into 2027. With underlying core price pressures beginning to ease and wage growth slowing, inflation appears to be under relative control – for now. Policymakers will be hoping this allows them to delay taking a more restrictive monetary approach until it is absolutely necessary, protecting households and businesses from the damaging effects of higher interest rates.
For businesses, this will provide a degree of certainty, reassuring those who are considering investment decisions, although persistent weak demand and business confidence across the Eurozone will continue to constrain any expansion plans for the majority.
Consumers will also benefit from this pause in interest rate hikes. Mortgage holders and households with variable-rate debt will avoid further repayment increases. If inflation continues to move towards target, real household incomes will start to recover and support consumer spending in the months ahead.
If inflationary pressures continue to fall back and economic growth remains weak across the region, the ECB is expected to maintain current rates for the rest of 2026.
But the path to price stability – and looser monetary policy – remains vulnerable to external shocks. The price of Brent crude oil has declined in recent months as geopolitical tensions have cooled, yet renewed hostilities in the Middle East have pushed prices up again, threatening to reignite inflation.
At the same time, another significant slowdown in global growth could push parts of the Eurozone towards recession, heightening the ECB’s difficulty in balancing their aims of generating growth while achieving price stability. It is crucial that policymakers set out a clear, long-term plan to achieve these dual aims, but they must ensure they are ready to adapt and act decisively in the face of changing global headwinds.
