ECB rate path remains uncertain despite U.S.-Iran ceasefire

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ECB stays cautious

Highlights

Bundesbank President Joachim Nagel warned inflation may remain elevated.
The ECB recently raised rates for the first time since 2023.
Energy-price pressure from the U.S.-Iran war remains a key concern.
The ECB is likely to wait for clearer data before setting its next move.

Energy shock still weighs on policy

In an interview with CNBC, Nagel said inflation still risks remaining elevated despite recent diplomatic efforts aimed at stabilizing the situation in the Middle East. Speaking on the sidelines of the ECB’s annual Forum on Central Banking in Sintra, Portugal, he pointed to energy prices as the main source of concern.

The warning comes shortly after the ECB raised its key interest rate for the first time since 2023. The central bank cited inflationary pressure linked to the U.S.-Iran war, which disrupted energy markets and lifted costs for businesses and households across Europe.

The end of active fighting does not automatically remove that pressure. Energy prices often affect inflation with a delay, moving through transport, electricity, manufacturing and services costs before showing up in consumer-price data. That is why policymakers are watching not only oil and gas prices, but also whether the earlier shock spreads into wages, services and broader business pricing.

ECB keeps options open

Nagel defended the ECB’s recent rate increase, saying it was the correct move given the risks at the time. But he also said it is too early to define the next stage of monetary policy because the situation in the Middle East remains unclear.

The U.S. and Iran are expected to hold talks in Doha after President Donald Trump said delegations from both countries would meet there. The ceasefire remains fragile, however, after weekend hostilities raised questions about whether the pause in fighting can hold.

That uncertainty leaves the ECB in a difficult position. If energy prices keep falling and the ceasefire stabilizes, pressure for further tightening may ease. If tensions return or supply risks persist, the central bank may face renewed pressure to keep rates high or raise them again.

The inflation risk Europe cannot ignore

The ECB’s target is 2%, but officials remain worried that energy shocks can keep inflation above that level for longer than expected. The euro area is particularly exposed because energy costs influence a wide range of prices, from household bills to transport and industrial production.

Nagel’s warning shows that the central bank is not ready to treat the ceasefire as the end of the inflation problem. The next policy decision will depend on whether lower energy prices become durable and whether broader inflation indicators start to soften. Until then, the ECB is likely to keep a cautious stance, even as markets look for signs that the latest rate increase may be enough.

As we previously reported, France inflation falls to the ECB target after energy costs retreat.

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