EU faces new inflation wave as ECB signals rate hike

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EU faces new inflation wave

Highlights

Dombrovskis said the ECB will need to respond to rising inflation.
The European Commission forecasts eurozone inflation at 3.1% in 2026.
The ECB’s inflation target is 2%.
The European Commission recently cut its growth forecast and raised its inflation outlook because of the energy shock.

Inflation shock puts rates back in focus

Speaking ahead of a meeting of EU economy ministers in Nicosia, Dombrovskis said rising inflation already requires a response from the ECB. He stressed that the central bank remains independent but noted that the European Commission’s inflation forecast for this year stands at 3.1%, well above the ECB’s 2% target.

According to Bloomberg, his comments came a day after the European Commission downgraded its economic outlook for the eurozone. The eurozone GDP growth forecast for 2026 was cut to 0.9% from 1.2%, while inflation is now expected to be around 3% because of higher energy prices and disruptions in commodity supply chains.

For the ECB, this is a difficult moment. Raising rates could help contain inflation expectations, but it would also increase pressure on businesses, the mortgage market and economic growth. That is why investors are now closely watching the central bank’s June meeting.

EU ministers seek balance between support and discipline

Dombrovskis also said the EU economy remains resilient, while repeating calls for Europe to reduce its dependence on fossil fuels. The energy shock caused by the war around Iran has again exposed the region’s vulnerability to sharp moves in oil and gas prices.

Eurogroup President Kyriakos Pierrakakis also backed the need for short-term measures but warned that the energy crisis must not be allowed to spread across the broader economy. Ministers broadly agree that support for households and businesses should remain temporary and targeted so it does not push prices even higher.

Italy and Spain are reportedly seeking greater flexibility under EU fiscal rules to expand support for consumers and companies. But for Brussels, that carries risk: excessive spending could add to inflation and make the ECB’s job harder.

Europe faces another stagflation risk

The eurozone’s main problem is that the current shock combines weak growth with rising prices. Dombrovskis has previously warned of the risk of a “stagflationary shock,” where high inflation comes together with low economic growth.

If inflation stays above 3% while growth remains below 1%, the ECB will have to choose between two bad options: fighting prices more aggressively or avoiding further pressure on the economy. For markets, that means more expensive credit, caution in European equities, and closer attention to every new signal on the war, oil prices, and energy supplies.

We also reported stocks rising as the dollar nears a six-week high on Iran uncertainty.

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