ECB Hikes Interest Rates Amid US-Iran Conflict, But May Be Done

The European Central Bank (ECB) appeared set to keep interest rates unchanged in 2026, but a surge in oil and natural gas prices due to the US-Iran conflict changed this outlook.

In June, the ECB raised its deposit rate by 25 basis points to prevent what was initially viewed as a temporary energy shock from becoming a broader inflation problem.

However, recent data suggests that higher energy costs are not feeding broadly into the economy, with both headline and core inflation surprising to the downside in June. Additionally, euro inflation swap rates have fallen below the ECB's 2% target over the next year.

The weakening growth outlook for the Euro Area also reinforces the case for no further increases in policy rates, with business activity remaining subdued and consensus forecasts for real GDP growth this year declining from 1.2% before the US-Iran conflict to 0.6%.