The easing of geopolitical tensions, which has driven down oil prices, is continuously reducing the energy-driven imported inflationary pressures faced by the eurozone, leading to a significant cooling of market expectations for further interest rate hikes by the European Central Bank.

On July 3rd, at the Aix-en-Provence Economic Forum in France, Governor of the Banque de France and ECB Governing Council member François Villeroy de Galhau stated that following the rate hike in June, the European Central Bank is now in a "good place." He indicated that it is still too early to determine the policy direction for the July and September meetings. Future policy will remain data-dependent, with no forward guidance provided, and this does not signal the start of a new sustained cycle of interest rate increases.

As the impact of the energy shock diminishes, diverging views on subsequent policy within the European Central Bank are gradually becoming apparent. On one hand, some officials believe that falling oil prices and cooling inflation provide room to pause rate hikes. On the other hand, there are concerns that previous energy costs could still transmit with a lag through wages and service prices, necessitating continued policy caution.

Falling Oil Prices Alleviate Inflation Pressure, ECB Emphasizes Data Dependence

Villeroy noted that the recent decline in oil prices is easing price pressures in the eurozone, particularly helping to curb inflation in the services sector. Currently, the European Central Bank has not observed a sustained "second-round effect" of rising energy prices transmitting to broader areas such as wages and services, suggesting that the previously feared risk of an inflationary spiral has not materialized.

The ECB's June meeting saw unanimous support for a 25 basis point rate hike, with officials generally concerned that rising oil prices could push up broader inflationary pressures. However, following that meeting, with geopolitical improvements leading to lower oil prices and eurozone inflation cooling more than expected, internal views on whether to continue tightening policy have begun to diverge.

The market has subsequently adjusted its policy expectations, with investors significantly scaling back bets on further ECB rate hikes this year. As the influence of energy prices on inflation wanes, the future path of eurozone interest rates will depend more on data such as core inflation and wage growth. The European Central Bank will continue to adhere to its decision-making framework of meeting-by-meeting, data-dependent assessment.