ECB meeting account signals higher euro area inflation and rate expectations

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ECB meeting signals higher inflation

Highlights

ECB Governing Council's September 2026 meeting revealed surging energy prices and renewed U.S.-Iran tensions raised euro area inflation and policy rate expectations.
Markets fully priced in a September rate hike, with expectations for the ECB's terminal rate exceeding 3% and 84 basis points of increases now seen by end-2027.
ECB staff projections revised up euro area headline inflation to average 3.0% in 2026 and 2.5% in 2027, citing persistent energy price pressures from geopolitical conflicts.

Policy signals from the September meeting

As reported by the European Central Bank, the account of its 9-10 September 2026 Governing Council meeting shows policymakers assessing a renewed energy-driven inflation shock, tighter financial conditions and a rise in market expectations for future interest rates.

Board member Isabel Schnabel said euro area financial markets had continued to be driven by energy price developments since the July policy meeting, with attention also shifting to the global rise in long-term yields. Persistently high energy prices, reinforced by concerns over food inflation, had pushed market expectations for inflation and policy rates higher, while renewed U.S.-Iran hostilities lifted oil and refined product prices and European gas prices rose to their highest level since early 2023.

Markets had fully priced in a rate increase at the September meeting, while expectations for the ECB's terminal rate had risen above 3% for the first time in the current hiking cycle. The account said markets had priced in 84 basis points of cumulative increases by the end of 2027, up from 64 basis points at the July meeting, even as respondents to the Survey of Monetary Analysts expected a more limited tightening path.

Long-term yields in the euro area had also moved higher in parallel with the U.S. market, although the ECB account said domestic factors, including a stronger macroeconomic environment and a reassessment of policy expectations, remained the main drivers. Sovereign bond markets stayed orderly, with spreads broadly stable, while euro area equity markets rose further on positive economic data, corporate earnings expectations and continued optimism around artificial intelligence.

Inflation outlook keeps pressure on euro area policy

Chief economist Philip Lane said the energy shock linked to the Middle East conflict was still generating persistent inflation pressures six months on. Oil prices stood at $97 per barrel, up 3% since the July meeting, while gas prices reached 73 euros per megawatt-hour, 17% higher than at that time, and diesel refining margins remained far above pre-war levels.

Euro area headline inflation, measured by the Harmonised Index of Consumer Prices, had increased to 3.3% in August from 2.9% in July, according to Eurostat's flash estimate. Energy inflation had risen to 14.3% from 10.3%, while food inflation remained unchanged at 1.2%. The account said indirect effects were still contained, with no material signs of second-round effects, as compensation per employee and negotiated wage growth both eased in the second quarter.

The September ECB staff projections saw headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. Compared with the June projections, inflation was revised up by 0.2 percentage points for 2027 and by 0.1 percentage points for 2028, while inflation excluding energy and food was projected at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028.

The account said the higher energy price path linked to the Middle East conflict and Russia's war against Ukraine was likely to keep headline inflation above target into the first half of 2027. After that, energy inflation was expected to fall and turn negative up to mid-2028, helping bring headline inflation lower, although stronger economic activity and the delayed effects of the energy shock were expected to keep underlying price pressures elevated through much of 2027.

In our earlier article, we covered ECB policymaker Primoz Dolenc’s view that borrowing costs may still need to move further into restrictive territory as energy, food and geopolitical risks keep inflation pressures elevated. We also noted that while core inflation showed signs of stability and wage-driven second-round effects appeared limited, rising long-term yields and winter gas supply risks were becoming key factors in the policy debate.

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