The European Central Bank (ECB) is facing an increasingly pressing environment for its monetary policy, as the war in the Middle East continues for a fourth month, the Strait of Hormuz remains effectively closed, and oil and natural gas prices are sky-high.
All signs point to the ECB raising its key interest rate (deposit facility rate) by 25 basis points to 2.25% next Thursday (11.6.2026), for the first time in over two and a half years. The last increase was in September 2023, when the ECB's deposit rate peaked at 4%, before being reduced by 2 percentage points from June 2024 to June 2025.
The message of policy change was sent by Isabel Schnabel, member of the ECB's Executive Board, who stated that interest rates must rise because the war has lasted much longer than anticipated and high energy prices are now spreading more broadly through the economy. She added that the increase would be necessary even if a US-Iran agreement to end the war were reached, because energy infrastructure in the Middle East has been damaged, implying that a return of fossil fuel prices to pre-crisis levels would be delayed. A peace agreement has been announced several times in the past month as a matter of days, but without any tangible result so far.
The ECB is not expected to commit to its next moves next Thursday, but will reiterate its standing position that decisions will be made at each meeting based on the available data. However, the longer a deal to end the war is delayed, the greater the risk of further inflation in the eurozone and another ECB rate hike. In a recent Reuters survey, 60% of economists predicted a second increase within 2026, likely in September, as money markets also anticipate.
The slowdown of the eurozone economy is, however, a development the ECB will consider carefully before proceeding with another rate hike, which would curb demand for consumption and investment and could push the economy into recession. The significant impact of the war on the economy is shown both by first-quarter GDP data and by survey data for the second quarter. Eurozone GDP fell by 0.2% in the first quarter (compared to the fourth quarter of 2025), as March was negatively affected by the war. Although the decline is mainly due to a 12.1% plunge in Irish GDP, which is influenced by multinational corporate activity, the impact of the war is evident.
The trend also appears negative in the second quarter this year. S&P Global's chief economist, Chris Williamson, noted, on the occasion of the company's survey of businesses in May, that their responses also suggest a possible GDP decline of 0.2%, barring any significant change in June. "The case for further rate hikes will be harder to support if the economy continues to weaken, especially since declining demand will limit the ability to raise prices and wages," he added.
The ECB will therefore have to weigh very carefully in its upcoming meetings the risk of inflation against the risk of a serious economic slowdown. Inflation in the eurozone continued its upward trend in May, reaching 3.2% from 3% in April and 1.9% in February. This development is mainly due to energy prices, which rose by 10.9% year-on-year, but for the first time since the war, price increases also occurred in other major product and service categories.
In the services sector, the price index rose 2.5% from 2% in April and 2.4% in February, while industrial goods prices (excluding energy) rose 0.9% from 0.8% and 0.7%, respectively. That is, there were secondary price increases in other sectors of the economy, a trend that will intensify the longer the reopening of the Strait of Hormuz is delayed.
In the analysis of the May survey, Williamson noted that price pressures have intensified to the most worrying level in over three years, suggesting that inflation could approach 4% in the coming months.
