Recent strikes between the U.S. and Iran have reignited concerns over oil supply, pushing Brent crude prices above $85 per barrel, up from around $70 just a week prior. This surge in oil prices complicates the European Central Bank's (ECB) monetary policy decisions, particularly ahead of its meeting on July 22.
Bundesbank President Joachim Nagel emphasized the need for caution amid this volatility. The ECB had previously cut interest rates four times in early 2025 but raised them by 25 basis points to 2.25% last month due to rising inflation, which peaked at 3.2% in May. Although inflation eased to 2.8% last month, energy costs surged by 8.7% year-on-year, indicating potential inflationary pressures.
The eurozone's reliance on imported energy—57% in 2024—makes it particularly vulnerable to fluctuations in oil prices.
Analysts from ING noted that upcoming inflation data will be crucial for shaping market expectations, but current conditions suggest that the ECB may need to remain vigilant against inflation risks without overly tightening monetary policy, which could risk pushing the eurozone into recession.
Investors are currently pricing in a 20% chance of a rate hike next week, with expectations for two additional hikes by spring 2027, raising the key deposit rate to 2.75%