European Central Bank (ECB) President Christine Lagarde attends a press conference on interest rate decisions in Frankfurt, Germany, Thursday, June 11, 2026.
Alex Kraus | Bloomberg | Getty Images
The European Central Bank is widely expected to raise interest rates on Thursday, but market watchers say uncertainty over the war between the United States and Iran is clouding the outlook for the bank’s long-term policy direction.
According to LSEG data, the market has priced in a 100% chance that the ECB will raise its key interest rate by at least 25 basis points.
ECB officials have said since the outbreak of the US-Iran war that they would take a meeting-by-meeting approach to monetary policy.
The September meeting comes days after data showed energy inflation soared to 14.3% and euro zone inflation reached 3.3% in August.
Inflation in the eurozone, a net importer of energy, has exceeded the ECB’s 2% target since war in the Middle East threatened the transit of primary goods through the Strait of Hormuz, sending oil prices soaring and creating instability.
Government borrowing costs have also risen sharply in recent weeks, with European bond yields reaching multi-decade highs as investors price in higher inflation and interest rate hikes as tensions in the Middle East escalate.
Eurozone 10-year government bond yield
The ECB raised interest rates in June for the first time since 2023, taking its key rate to 2.25%, making it the first major central bank to raise rates in response to the war.
ECB President Christine Lagarde said at the time that there were upside risks to inflation and downside risks to economic growth, but stressed that policymakers were “not committing in advance to any particular interest rate path.”
The ECB kept interest rates unchanged at a subsequent Governing Council meeting, saying the Governing Council is “closely monitoring the strength and duration of the (energy) shock and its indirect and secondary effects.”
Why analysts are ‘confident’ the ECB will raise interest rates
Aberdeen economist Felix Feather said in a note on Wednesday that an ECB rate hike was “almost certain”, adding that the more important question was whether the ECB’s tone signaled to markets that this was the next step in a prolonged tightening cycle.
“The tone is likely to be hawkish,” Feather said. “While the euro area economy is proving more resilient than the ECB expected, higher energy prices, stronger forward-looking wage trends and a modest rise in market-based inflation expectations will keep policymakers focused on upside risks.”
Feather said the ECB was likely to revise its growth outlook upwards because the economic impact of the war was more limited than expected, but said there remained a “path to keeping interest rates at 2.5% for an extended period” after Thursday’s meeting.
“Underlying inflation measures continue to ease, wage pressures remain relatively subdued, and there is still scant evidence that the energy shock is causing widespread second-order effects,” he said.
“However, this would likely require the US and Iran to ease tensions in the Middle East to ease energy markets, which does not seem imminent at this point.”
Why bond comments are important
Jonathan Pryor, co-head of dealing and head of private markets at Marex FX, warned in a note on Wednesday that the ECB could be “forced out” following Thursday’s decision.
“If the ECB miscalculates its ‘one and done’ calculation and is left behind by the G10 countries with higher interest rates, it could have a long-term impact on the reputation of Lagarde and the ECB,” he said.
“Adding complexity for the ECB will be the less talked about challenge of adjusting monetary policy while responding to fluctuations in bond spreads between sovereign states,” he added.
“Any comments related to the bond market will be important, because the bond market is usually a place the ECB doesn’t want to go to, but it is an unavoidable element of the challenges facing the ECB in the coming months.”
Uncertainty over the ECB’s interest rate path has divided investors. Deutsche Bank’s surveys of clients over the past week showed there was no consensus on where Thursday’s decision places it in the central bank’s rate-hike cycle.
More than a third of respondents agree that the ECB will raise interest rates to 2.75%, and one in four said one more hike is imminent, Deutsche Bank economists said in a note on Tuesday.
It added that a further quarter of respondents expected the cycle to end at a final rate of 3%, suggesting there could be three more rate hikes before the ECB’s tightening cycle ends.
