ECB faces harder rate call as Middle East conflict pushes crude prices higher

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ECB rate outlook shifts

Highlights

The ECB deposit rate is now 2.25%.
Markets see about a 20% chance of a July hike.
Energy costs rose 8.7% year over year.

Investors were reassessing the July 22 decision after Brent crude climbed back above $85 a barrel. The move followed several days of strikes linked to the Strait of Hormuz, a critical route for global oil shipments, CNBC reported.

Oil shock complicates the ECB call

Bundesbank President Joachim Nagel, one of the ECB’s rate setters, said the renewed Middle East conflict and rise in oil prices showed that the outlook remained “extremely volatile.” He said policy should remain cautious, but that officials must be ready to act decisively if needed.

The ECB has already shifted direction this year. It cut interest rates four times in the first half of 2025, lowering the deposit rate from 3% to 2% by mid-June. But last month it raised rates by 25 basis points, bringing the deposit rate to 2.25%, after inflation pressure returned.

Before the latest escalation, headline inflation had been close to the ECB’s 2% target. It later reached 3.2% in May, before easing to 2.8% last month. Energy costs still rose 8.7% year over year, while core inflation was limited to 2.4%, suggesting that broader second-round effects have so far remained contained.

Markets price in more uncertainty

The problem for policymakers is that the next decision will come before fresh data. Initial second-quarter GDP figures are due July 30, while July inflation data will arrive July 31.

That leaves the ECB making its call without the latest read on growth or prices. Eurozone bond yields have already moved higher, with the German 10-year Bund yield at 3.1046% on Wednesday.

Markets still point to only about a 20% chance of a rate increase next week. But investors expect two additional 25 basis point hikes by next spring, which would lift the deposit rate to 2.75%.

Energy risk meets weak growth

The oil shock matters because the eurozone remains highly exposed to imported energy. The bloc imported 57% of its energy needs in 2024, making higher crude prices a direct risk for inflation, industry, and household spending.

At the same time, a tighter policy stance could deepen economic weakness. The eurozone economy contracted 0.2% year over year in the first quarter of 2026. That leaves the ECB balancing two risks: allowing higher energy costs to feed inflation expectations, or raising rates into a fragile economy.

As we previously reported, Christine Lagarde may leave ECB earlier than expected.

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