Hawkish ECB Policies Loom as Energy Risks Persist

Financial markets are bracing for more hawkish policies from the European Central Bank (ECB) as geopolitical tensions threaten to prolong energy-related inflation.

The conflict between the US and Iran has led to higher crude oil prices, with Brent crude trading above $90 a barrel. Investors are concerned that the inflation impact of the conflict could extend beyond higher crude oil prices.

Market pricing now reflects a growing probability of further rate increases after an expected hike in September. The ECB raised rates in June in response to inflationary pressures triggered by the energy shock, and investors are now betting that the deposit rate could approach 3% by late 2027.

The resilience of rate-hike expectations suggests that investors remain concerned about the broader inflation consequences of the conflict and the potential response from the ECB.