The European Central Bank is widely expected to raise interest rates by 25 basis points at its meeting on Thursday, September 10, after eurozone inflation accelerated to 3.3% in August. Swap markets put the probability of a hike at about 96.6%, and a second increase is already priced for the spring.
The move would take the deposit rate to 2.5%. It would be the second hike of 2026, following a June increase that ended an 18-month easing cycle. Both reversals trace back to one cause: the closure of the Strait of Hormuz and the energy shock that followed.
Energy is doing the damage
Energy prices are the main driver of eurozone inflation, ECB economists Kristina Barauskaite Griskeviciene and Claus Brand wrote in a paper published Tuesday. Eurozone energy costs rose 10.3% year over year in July, and Goldman Sachs Research estimated the August figure at 14.4%. Goldman expects headline inflation to peak at 3.4% in the fourth quarter. DekaBank forecasts inflation staying above 3% this year with a peak near 3.5%, then a fast fall in the spring as base effects kick in.
Core inflation, which strips out energy and food, is expected to have risen to 2.6% in August from 2.5% in July. Services inflation has held near 3.3%. DekaBank strategist Joachim Schallmayer cautioned against reading the services number as a second-round effect, noting there are no signs of accelerating wage growth. Instead, energy costs and delayed price adjustments are embedded in services prices.
“At the current policy rate, inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary,” ECB executive board member Isabel Schnabel told Bloomberg last week.
A hike into weak growth
The uncomfortable part of the decision is the economy it lands on. Eurozone GDP growth stalled at 0.1% quarter on quarter in the first quarter of 2026. Germany halved its growth forecast for the year from 1.0% to 0.5% in April after two consecutive years of contraction. Spain is the outlier, growing 2.7% year over year, more than triple the bloc average.
JPMorgan expects the ECB to raise rates a third time in December, taking the deposit rate to 2.75%. The bank cited persistent inflation, higher energy costs and resilient eurozone growth, though the growth claim sits awkwardly with the headline numbers from Germany. Economists polled by Bloomberg earlier this year settled on two hikes in 2026 with the balance of risks tilted toward more.
The counterargument is straightforward: tightening monetary policy into an economy growing at barely 1% risks a stagflationary outcome. The ECB spent 2022 and 2023 hiking to defeat an inflation caused by one energy shock, the loss of Russian gas, then spent 2024 and 2025 cutting to support the aftermath. It now faces a second energy shock demanding the same medicine for a weaker patient.
What decides the path
Everything hinges on how long the Hormuz disruption lasts. Brent crude rose above $97 on Monday after renewed US and Iranian strikes on tankers, and US retail diesel has hit a record $5.85 a gallon. Only four commodity vessels crossed the strait on Thursday, against a recent daily average of about 15, according to FXCM’s Monday briefing. If oil flows normalize by the third quarter, energy prices would retreat, headline inflation would fall toward 2% by early 2027, and the ECB could pause after one or two hikes. If the disruption persists through year-end, wage settlements would start embedding higher energy costs, and the bank would face a hiking cycle it does not want.
The ECB staff projects headline inflation averaging 2.6% for 2026, above target, and warns that as the period of high energy prices extends, the impact on broader inflation through second-round effects intensifies. Thursday’s decision, the statement accompanying it and the updated staff projections will show how far the governing council thinks that risk has already materialized. Markets will also watch what Schnabel and her colleagues say about the spring, where a second 25-basis-point move is already priced.
For households and companies, the practical effects are concrete regardless of the debate: mortgage rates rise, corporate borrowing costs increase, and government debt service consumes more of national budgets across the bloc.
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