Christine Lagarde, Boris Vujčić: Monetary policy statement

The Governing Council hiked 25bp again, following the June increase, on an energy-driven inflation shock from the Middle East conflict. The new staff round leaves 2026 headline unchanged at 3.0 per cent but revises 2027 and 2028 up, with core at 2.6 per cent in 2027 and still 2.3 per cent in 2028, so underlying inflation does not get back to target inside the horizon. Growth was revised up for 2026 and 2027 on resilience, and risks are explicitly upside for inflation, downside for growth. No pre-commitment, no guidance on a terminal rate.

What’s new: The hike itself was the event; what is new beyond it is the projection round. Core revised up in the outer years and still 2.3 per cent in 2028 is the hawkish surprise embedded here, alongside upward growth revisions that Lagarde attributes to resilient private consumption and public spending. Offsetting that: the explicit line that wages show no material response to the energy shock, compensation per employee decelerating to 3.3 per cent, unit labour costs down to 2.6 per cent, and long-term expectations anchored around 2 per cent. The statement gives no vote split and no signal on whether this is the last hike.

KEY FINDINGS

• Second consecutive 25bp hike, with the June move explicitly referenced as already feeding into bank lending rates (firms 3.6 to 3.8 per cent). Confirms a live tightening cycle rather than a one-off insurance move, and the transmission commentary reads as satisfaction rather than alarm.
• Headline projections 3.0 / 2.5 / 2.1 per cent; core 2.5 / 2.6 / 2.3 per cent, with 2027 and 2028 headline revised up versus June and core rising in 2027 before moderating. Neither headline nor core is at 2 per cent at the end of the horizon, which mechanically argues for more tightening unless the energy path rolls over.
• Growth revised up for 2026 and 2027 and the risk balance stated as upside for inflation, downside for growth. Removes the usual dovish offset: a weak demand argument against hiking is not available when the near-term growth outlook has improved.
• Wages do not show a material response to the shock; compensation per employee 3.3 per cent from 3.5, unit labour costs 2.6 per cent from 3.5, unit profits up from 0.3 to 2.2 per cent, wage tracker only a modest uptick to 2.7 per cent in H1 2027. This is the main brake on a longer hiking sequence: no second-round wage evidence means the Council can stop as soon as energy stabilises.
• Retains 'well positioned' plus data-dependent, meeting-by-meeting and no pre-commitment to a rate path. The desk should not read this as a signal that the cycle is done, but there is nothing here that pre-loads October either.

FROM THE DOCUMENT

The Governing Council today decided to raise the three key ECB interest rates by 25 basis points.

Compared with June, the baseline projection for inflation in 2026 is unchanged, while it has been revised up for 2027 and 2028.

Wages do not show a material response to the energy shock at this stage.

We are not pre-committing to a particular rate path.