May 2026

ECB policymakers warned that the markets may be underestimating the long-term inflation risks stemming from elevated energy costs, renewed supply-chain disruption, and rising inflation expectations. They cautioned that wage pressures can emerge and stressed the need for timely action to avoid being “too late”, reinforcing the expectations that the ECB may remain inclined toward further tightening if geopolitical-driven inflationary pressures broaden across the eurozone economy. 

April 2026

The sharp rise in developed market interest rate including Eurozone since the start of the Iran war shows growing concern about higher oil prices fueling inflation, which will drive central banks including European Central Bank (ECB) to tighten monetary policy further in the near term. Oil shock can create a dual impact – on one hand, rising oil prices push up headline inflation driving central banks to maintain or tighten monetary policy. On the other hand, higher energy prices can act as a drag on economic activities, weighing on consumption, pressuring corporate margins and broader growth dynamics. If the shock persists, the focus can shift from inflation control to growth preservation forcing central banks to ease policy later in the cycle as the economic slowdown become a more concern even if inflation remains above target. Policymakers in Europe are expected to maintain a relatively hawkish tone during this ongoing uncertainty provided by energy market.

European economy is more sensitive to oil shocks than the US economy. Oil shock can raise inflation and trim down growth. It is because Europe is an oil importer and larger share of energy accounts for Europe’s consumption basket. As a result, Europe can take a larger hit from this energy shock than the US. When the Middle East tension persists, Europe can face significant price spikes due to lack of gas ahead of winter, which will affect across industrial supply chains and at that stage, demand destruction can happen in the economy. In addition, expansionary fiscal policy (defense, energy, and technology) in Europe can keep rates higher for longer even if the near-term hikes can be proven to be premature despite the on-going energy supply shock from Iran war. Increase in the near-term inflation expectations and worsening growth outlook from the energy price shock increased investors’ bet on interest rate hike by the ECB.

ECB left the three key interest rates unchanged – interest rates on the deposit facility (a pre-set interest rate at which banks make overnight deposit with the ECB), the main refinancing operations (The benchmark policy rate for most lending in the euro area; banks borrow funds from the ECB against collateral, routine funding for banks), the marginal lending facility (a rate at which banks can access overnight liquidity against collateral as the last resort funding when interbank market fails, emergency overnight liquidity and ceiling rate) stayed at 2%, 2.15% and 2.4% respectively. Stagflationary pressure is increasing with weaker-than-expected GDP growth, surging inflation and tighter credit standards in the Eurozone.