ECB Tapering Expectations: Has Monetary Tightening Cycle Reached Its End?

The European Central Bank (ECB) appeared to be on track to keep interest rates unchanged throughout 2026, but the escalating US-Iran conflict disrupted this outlook. Severe supply disruptions and constraints on shipping through the Strait of Hormuz triggered a sharp increase in oil and natural gas prices, pushing inflation above target.

Policymakers became concerned that higher energy costs could spill over into other goods and services, making inflation more persistent. The ECB responded by raising its deposit rate by 25 basis points in June to prevent what was initially viewed as a temporary energy shock from becoming a broader inflation problem.

Recent data suggests that the inflation risks have eased, with both headline and core inflation surprising to the downside in June, and wage growth continuing to moderate. Euro inflation swap rates, which measure investors' inflation expectations, have also fallen below the ECB's 2% target over the next year.