ECB confronts inflation and war risks

The European Central Bank faces a tough test in July 2026, as it must balance rising inflation with the risk of the Middle East war impacting the economy and oil prices. Current forecasts suggest a possible increase in interest rates during the September meeting, especially amid rising energy prices and mounting inflationary pressures. The market reflects nearly a 100% chance of a rate hike in September, although any surprise increase may not lead to a significant rise in bond yields, as it is viewed as part of an expected gradual tightening plan. High inflation is expected to persist, with real interest rates increasing in the region, while analysts warn that continued rises in energy prices could press on the euro and help keep the currency above 1.14 dollars, provided that the ECB adopts a hawkish tone to combat inflation and halt the euro’s decline.

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