Renewed Hormuz tensions prompt ECB rate hike amid ‘extremely volatile’ outlook
Christine Lagarde, president of the European Central Bank (ECB), speaking at the ECB Forum in Sintra, Portugal on July 1st, 2026.
CNBC
Several consecutive days of strikes between the US and Iran have once again put oil prices in the spotlight – and cast doubt on the European Central Bank’s interest rate decision next week.
On Wednesday investors were again pricing in the ECB’s July 22 monetary policy meeting as rising oil prices cast doubt on expectations.
“The resurgence of military conflicts in the Middle East and the new rise in oil prices underscore that the situation is still very volatile and uncertainty is just as high,” Bundesbank President and ECB chief Joachim Nagel told Reuters on Wednesday.
“It is still appropriate to react cautiously, but take decisive action if necessary,” he said. “Monetary policy will maintain its cautious stance.”
ECB reverses course
The ECB cut interest rates four times in the first half of 2025, taking its key deposit rate from 3% at the start of the year to 2% in mid-June. But last month it was forced to change course, moving 25 basis points to its current rate of 2.25%.
Headline inflation was close to the ECB’s target of 2% before the outbreak of the Iran war and then accelerated to 3.2% in May. Preliminary estimates show that inflation in the eurozone fell to 2.8% last month despite a year-on-year increase in energy costs of 8.7% per month, as core inflation was limited to 2.4% – suggesting the limited effects of a “second round” of inflation across the economy.
But oil prices rallied again this week as several days of hostilities between the US and Iran over control of the crucial Strait of Hormuz reignited fears over oil supplies. September futures for international benchmark Brent crude traded higher again early on Wednesday, above $85 a barrel, having traded near pre-war levels of around $70 last week.
The price of oil is important for the eurozone economy, which imports 57% of its energy needs in 2024, according to the latest data available from Eurostat.
But policymakers will also note that an overly restrictive monetary policy stance could plunge the eurozone economy into recession after contracting by 0.2% year-on-year in the first quarter of 2026.
Eurozone bond yields rose sharply last year
Eurozone inflation peak ‘may not be in sight yet’
Policymakers will also know that preliminary estimates of second-quarter GDP growth and July inflation won’t be available until July 30 and July 31 respectively — meaning next week’s rate decision will be made without access to the latest data.
ING ratings strategists Michiel Tukker and Benjamin Schroeder wrote in a note on Wednesday that the euro’s inflation data “will be important in challenging the hawkish market position,” but “even so, those numbers will not be enough to comfort markets about the risks of a second cycle.”
“All this uncertainty means that markets’ prices for the European Central Bank could continue to diverge from the Fed,” they said. “Inflationary pressure in the US should be low, while in Europe it is possible that a higher rate may not be seen, especially if energy prices continue to rise again.”
The drop in oil prices last month has led investors to effectively rule out an ECB rate hike next week, and current market prices point to a nearly 20% chance of a hike. But investors still expect a two-point rate hike of 25 basis points next spring, which would bring the ECB’s key deposit rate to 2.75%.
“At the moment we are very much looking at the price effects of the Middle East war and the possible effects of the second round,” Austrian central bank chief Martin Kocher told German newspaper Börsen-Zeitung on Wednesday. “Currently, we do not see any results in the second round, but it must also be consistent with our monetary policy and inflation expectations,” he said.
