The European Central Bank building is pictured ahead of the meeting of the governing council of the ECB in Frankfurt am Main, western Germany, on July 27, 2023.
DANIEL ROLAND/AFP via Getty Images
Business lending across the eurozone accelerated to its fastest pace in three years even as the European Central Bank raised rates — and the ECB’s own internal hawks, whose deliberations became public Thursday morning as the bank released its July meeting accounts, argued that fact alone was proof the current rate of 2.25% is not actually cooling the economy. The accounts, published Thursday at 13:30 Central European Time to coincide with the opening day of the Jackson Hole Economic Policy Symposium in Wyoming, reveal a Governing Council far more divided than its unanimous hold vote on July 23 suggested.
Unanimity That Masked a Real Fight
The Governing Council voted unanimously to hold all three key ECB rates steady following June’s 25-basis-point hike: the deposit facility at 2.25%, the main refinancing rate at 2.40%, and the marginal lending facility at 2.65%, per the ECB’s July 23 press release. The unanimous outcome looked like consensus. The accounts say otherwise.
Some members stated explicitly that, given the data arriving since the June meeting, they “would not have opposed raising rates” at the July gathering. That language was no throwaway comment — it placed a live rate hike squarely on the July table. The hawkish faction went further: they described the probability of any scenario in which a further hike would not eventually be warranted as low, pointing to ECB June 2026 staff projections showing that rates needed to increase under every scenario, including the mildest possible energy-shock outlook.
Why Credit Growth Matters More Than It Looks
The hawks did not invoke the energy shock as their primary argument. They invoked the credit data — and those data tell an uncomfortable story.
Annual growth in bank lending to non-financial corporations reached 4.0% in May, up from 3.4% in April, marking the fastest rate of expansion in three years, according to Reuters citing ECB lending data. The ECB’s June monetary aggregates release confirmed lending held at 4.0% in June. Lending to households also continued to expand. Crucially, the accounts note that growth in longer-term loans — the kind that tracks capital investment and durable purchases, not just working-capital borrowing — had been “quite robust” alongside the headline acceleration.
For the hawks, this was Exhibit A in a straightforward argument: if monetary policy were genuinely restrictive, credit would not be accelerating to multi-year highs. The implication cuts to the core of the ECB’s current position — and it is one that economists recognize as the neutral rate problem.
The ECB deposit facility rate of 2.25% may be approximately at the eurozone’s “natural” or neutral rate (r*) — the level where monetary policy neither stimulates nor slows economic activity — rather than above it. Pre-war ECB staff estimates of r* clustered in the 1.75–2.25% range. If the hawks are right that 2.25% is at neutral rather than above it, then the June hike restored neutral monetary conditions but achieved no actual restriction. Cooling credit growth would require pushing the deposit rate into “mildly restrictive territory” above r* — which is precisely what the hawks demanded.
Crack Spreads and Refinery Destruction: Inflation’s Second Engine
The ECB accounts reveal a Governing Council wrestling with an inflation driver that monetary policy cannot easily address: the destruction of refining capacity across the Middle East and Russia.
A crack spread is the margin a refinery earns by turning crude oil into usable fuels like gasoline, diesel, and jet fuel, as explained by the EIA’s crack spread overview. Normally those margins stay modest. In 2026 they have shattered records. The diesel crack spread reached $102 per barrel — an all-time high, nearly three times pre-war levels — driven by the twin disruptions of Hormuz-area conflict closing Middle Eastern crude flows and sustained Ukrainian drone strikes on Russian refining infrastructure. The 3-2-1 crack spread, the most closely watched measure of overall refining margins, surged past $60 per barrel to its own all-time high, as confirmed by analysts citing Yahoo Finance data. EIA data confirmed that by Q2 2026, gasoline crack spreads were up 60% from a year earlier and distillate and jet fuel crack spreads were more than double year-ago levels, per EIA petroleum market data.
The ECB accounts flag crack spreads explicitly, noting they reached new all-time highs during the period under review. Petrol and diesel prices are being driven up not just by crude oil costs but by constrained refining capacity — meaning that even if Hormuz diplomacy partially succeeds and crude prices ease, retail fuel prices may not follow to the same degree. JPMorgan commodity research head Nat Vachon framed the key uncertainty: the critical question is what share of the Middle East’s 11.7 million barrels per day of refining capacity is immediately restartable versus requiring extensive repairs. For the ECB, higher pump prices push headline inflation up and give price-setting firms cover to raise prices on goods and services well beyond energy — exactly the second-round effect the Governing Council is watching most closely.
Why the Hawkish Push for Pre-Emptive Action
The hawks made a second-order argument that goes beyond the immediate data: hesitation now creates a harder problem later.
Delay in tightening, they argued, risks holding up inflation’s return to the 2% target, affects inflation expectations in a lasting way, and ultimately requires more aggressive tightening further down the line — inflicting greater damage on households and businesses than moving sooner would. The argument draws on the historical lesson of the 1970s: central banks that waited for second-round effects to appear before acting found those effects far harder to break once established.
The accounts note the hawks assessed the Strait of Hormuz situation with particular pessimism: a durable resolution had become less likely given fundamental disagreements between the United States and Iran over the Iranian nuclear program and Hormuz navigation rights. Even during the brief ceasefire that preceded the July meeting, they noted, oil price futures held elevated over the medium term and natural gas prices and crack spreads continued to rise — suggesting the pause provided only limited reassurance.
Aggregate demand was also flagged. The hawks pointed to more resilient-than-expected consumer and business spending as giving firms — including oil refineries — the pricing power to pass higher input costs through to customers. In that environment, waiting for evidence of second-round effects before acting is structurally backward: by the time the evidence appears, the spiral has already begun.
Market-based measures of inflation compensation, as recorded in the accounts, showed investors pricing inflation at 2.9% for 2026, 2.3% for 2027, and 2.0% for 2028. That path — above target through 2027 before converging — is not a picture of an economy where markets believe inflation will resolve itself without further action.
Why the Majority Held Firm — and What Changes in September
The majority of the Governing Council did not dismiss the hawkish arguments. They reframed them.
The key majority distinction was between a fragile situation and an acute one. Under conditions that were fragile but not yet acute, and with the economy sitting close to the June baseline projections, the most prudent course was to move slowly — reflecting the option value of waiting through summer before acting. Piling a second hike on top of a first whose effects were still transmitting through the economy risked compounding tightening with consequences that would not be clear for 12 to 18 months. A hike that then had to be reversed because the Middle East conflict resolved quickly would damage the ECB’s credibility more than a delay.
September 10, when the next full set of staff macroeconomic projections is released, changes the architecture of the decision, per the ECB Governing Council meeting calendar. By then, the Governing Council will have two additional months of inflation data, the final Eurostat Q2 GDP reading (due September 7), and — critically — projections that fully incorporate both the energy shock and the Q2 growth outcome. The ECB’s June 2026 projections showed headline inflation averaging 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. If updated September projections maintain or worsen those paths, the majority’s rationale for waiting evaporates.
The majority also made a structural argument: ECB staff analysis attributed the current inflation surge almost entirely to the energy supply shock, with virtually no contribution from aggregate demand or fiscal policy — unlike the 2021–22 episode. On that reading, raising rates further addresses the symptom (inflation) but not the cause (supply constraints). The hawks’ counter was that restoring restrictive monetary conditions prevents the symptom from becoming self-perpetuating regardless of its origin.
What the Jackson Hole Timing Means
The ECB’s decision to publish the July accounts on the opening day of Jackson Hole is not accidental. The annual symposium hosted by the Federal Reserve Bank of Kansas City — this year themed “Financial Innovation: Implications for Payments and Policy” — is the global central banking community’s most visible communication venue. ECB board member Isabel Schnabel is participating in a panel discussion at the symposium today, with her remarks scheduled for 17:55 Central European Time (9:55 a.m. local Wyoming time), per the ECB weekly schedule.
Publishing the accounts on the same morning Schnabel speaks sends a signal: the ECB wants markets to be reading the hawks’ arguments while senior officials are available to comment on them. Money markets on Thursday were pricing approximately 40 basis points of additional ECB tightening by year-end, with the September hike almost fully priced in. Germany’s 2-year Bund yield has functioned as the real-time gauge of ECB rate expectations all summer; any comments at Jackson Hole indicating the hawkish camp is gaining ground could push that yield higher within the session.
What Matters for Borrowers Before September
The accounts make the September 10 meeting’s outcome more predictable, not less. A unanimous July hold with a vocal hawkish minority, combined with credit data that substantiates their core argument, points firmly toward a 25-basis-point increase to 2.50% in September — a view reflected in market pricing and in statements from ECB policymakers including Philip Lane and Peter Kazimir, who have both signaled additional tightening is warranted, per ECB sources reported by Reuters.
For eurozone residents with variable-rate mortgages or loans, the implications are practical. A move from 2.25% to 2.50% on the deposit facility rate feeds through to variable lending rates, typically within weeks of an ECB decision. For a €300,000 variable-rate mortgage, a 25-basis-point increase adds approximately €750 per year in interest. Fixing a rate now, before the September 10 decision, removes that uncertainty — but requires acting before the meeting date.
The larger question the accounts raise is whether September will be the last move or the beginning of a sustained push into genuinely restrictive territory. If credit growth at 4.0% persists after a September hike — if firms and households continue borrowing at multi-year highs despite a 2.50% deposit rate — the hawkish faction’s argument becomes even stronger: the neutral rate is higher than the ECB thought, and the tightening cycle is not over.
Frequently Asked QuestionsWill the ECB raise rates at the September 10, 2026 meeting?
Money markets on Thursday were pricing the September hike as almost fully certain, with approximately 40 basis points of additional ECB tightening expected by year-end. The July accounts — published today — make clear that the hawkish faction is not simply a minority voice but a group with specific empirical evidence (accelerating credit growth) backing its call for further action. Barring a dramatic deterioration in eurozone growth data or a swift resolution of the Middle East conflict, the burden of proof at the September 10 meeting has shifted from justifying a hike to justifying another hold.
What does the ECB’s credit growth data actually reveal about whether rate hikes are working?
The headline figure — business lending growing at 4.0% annually, a three-year high — suggests that either the June rate hike has not yet transmitted into tighter credit conditions, or that the current 2.25% deposit facility rate is approximately at the eurozone’s neutral rate rather than above it, as confirmed by the ECB June monetary aggregates. The neutral rate (r*) is the level where monetary policy neither stimulates nor restrains the economy. Pre-war ECB estimates placed r* in the 1.75–2.25% range. If 2.25% is at neutral, then the ECB has returned to a neutral stance — not a restrictive one — and borrowing costs have not yet been pushed high enough to meaningfully slow credit expansion.
What are crack spreads, and why do they matter for inflation — and for ECB policy?
Crack spreads are the refining margin between crude oil input costs and the price of finished fuels like gasoline, diesel, and jet fuel, as the EIA crack spread explainer describes. In 2026, diesel crack spreads reached $102 per barrel — an all-time high — because Middle Eastern refinery capacity has been damaged or closed by the Iran war, and Russian refineries have been disrupted by Ukrainian drone strikes, per EIA petroleum markets data. The significance for ECB policy: even if diplomatic progress on the Strait of Hormuz reduces crude oil prices, pump prices may stay elevated if refining capacity cannot be quickly restored. That means European consumers continue paying high energy prices — feeding through into broader inflation — even in a partial diplomatic resolution scenario. Monetary policy cannot repair refineries; it can only try to prevent elevated fuel prices from entrenching higher wages and prices across the rest of the economy.
How does an ECB rate hike affect American investors and travelers?
When the ECB raises rates while the Federal Reserve holds steady, the interest rate differential between the euro and the dollar narrows in the euro’s favor. A narrowing differential typically strengthens the euro against the dollar. EUR/USD was trading near $1.17 on Thursday. A September ECB hike that pushes EUR/USD higher would make European goods more expensive for American importers, European travel more costly for American tourists, and European equities worth more in dollar terms for US investors holding euro-denominated assets. It also applies pressure to US multinationals that report in dollars but earn revenue in euros, since a stronger euro means those earnings translate into more dollars when repatriated.