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QNB said in its weekly commentary published on August 29 that the need for further monetary policy tightening by the European Central Bank has diminished. The bank cited eased risks of energy price shocks spilling over into broader inflation, a weakened growth outlook for the Euro Area and a shift by policymakers toward a wait-and-see approach based on incoming data. According to QNB, the 25 basis point rate increase implemented in June is likely to mark the end of the tightening cycle unless a new inflationary shock materializes, with policy rates expected to remain unchanged for the rest of the year. The assessment follows the ECB’s decision to lift its deposit facility rate to 2.25 percent in response to disruptions from the US-Iran conflict.
At the start of 2026 the ECB had appeared likely to hold rates steady after inflation approached its 2 percent target and the deposit rate stood at a neutral 2 percent, QNB recalled. However the escalation of the US-Iran conflict disrupted shipping through the Strait of Hormuz and drove up oil and natural gas prices, prompting the June hike to guard against persistent inflationary effects through second-round channels. The Euro Area’s heavy reliance on natural gas both as an energy import and as a price setter in electricity markets made it especially vulnerable to such spikes, the bank noted.
The Qatari bank outlined three main reasons supporting its view that no further hikes are required. Recent inflation readings have come in below expectations for both headline and core measures in June while wage growth has continued to moderate, limiting the risk of second-round effects. Inflation swap rates, a market gauge of expectations, have fallen below the ECB’s 2 percent target over the next year, indicating that the energy-driven shock is likely temporary.
A deteriorating growth picture further argues against additional tightening, QNB stated. The composite Purchasing Managers’ Index has stayed below the 50-point threshold separating expansion from contraction for the past three months. Consensus forecasts for Euro Area real GDP growth in 2026 have been revised down sharply to around 0.6 percent from 1.2 percent before the conflict, close to the 0.8 percent foreseen in Eurosystem staff macroeconomic projections for the euro area.
ECB communications reflect an increasing preference for leaving policy rates unchanged, according to the QNB analysis. The Governing Council at its June meeting emphasized a data-dependent and meeting-by-meeting approach without pre-committing to any particular path for rates. This stance was reinforced at the annual Forum on Central Banking in Sintra, Portugal, where President Lagarde noted that risks to inflation and growth had become more broadly balanced and other members indicated openness to holding rates if incoming data confirm receding pressures.
The ECB kept its three key interest rates unchanged at the July 23 meeting, leaving the deposit facility rate at 2.25 percent, the main refinancing operations rate at 2.40 percent and the marginal lending facility rate at 2.65 percent. Governing Council accounts from that meeting showed members agreed that incoming data provided a strong case for pausing after the June adjustment amid high uncertainty from the Middle East conflict. Headline inflation decreased to 2.8 percent in June from 3.2 percent in May, according to Eurostat data, consistent with the downside surprises highlighted in the QNB commentary.
