ECB to Hike Rates Twice in 2026 as Iran War Drives Inflation to 3%, Bloomberg Survey Shows

The European Central Bank (ECB) will execute two interest rate hikes in 2026 as the Iran war sends energy-driven cpi" title="Understanding inflation and CPI in forex">inflation surging across the eurozone, according to a Bloomberg survey of economists published May 11. The consensus forecast marks a dramatic policy reversal for the central bank, which had been cutting rates as recently as last year.

June and September Rate Hikes Now Base Case

Economists surveyed by Bloomberg expect quarter-point rate increases at both the June and September policy meetings, bringing the ECB's deposit rate from its current 2.0% level to 2.50% by Q4 2026. Markets have moved aggressively to price in the hawkish shift, with money markets now fully expecting three rate hikes over the remainder of the year.

The policy pivot comes as eurozone inflation accelerated to 3.0% in April 2026, up from 2.6% in March and well above the ECB's 2% target. Energy prices have been the primary driver, surging 10.9% year-over-year as the closure of the Strait of Hormuz chokes off crude oil supply from the Persian Gulf.

Iran War Upends ECB Policy Path

The military conflict between the United States and Iran, which began in February 2026, has disrupted approximately 1 billion barrels of oil flow through the Strait of Hormuz—one of the world's most critical energy chokepoints. Despite massive supply losses, Brent crude prices have remained volatile rather than spiking to 2022 levels, partly due to strategic reserves being released by major economies.

However, the inflationary impact is hitting Europe particularly hard. ECB President Christine Lagarde acknowledged at the April 30 policy meeting that inflation risks had "intensified" and that the central bank's baseline scenario—which already forecast 2.6% average inflation for 2026—was at risk of being breached.

"The option of a rate hike was already put on the table as inflation developments were moving away from the ECB's baseline projection," Lagarde told reporters following the April meeting, where policymakers held rates steady but signaled June action was firmly on the agenda.

EUR/USD Implications and Market Positioning

The hawkish ECB repricing has provided support for the EUR/USD currency pair, which had been under pressure earlier in 2026 due to diverging monetary policy expectations. With the Federal Reserve holding its benchmark rate in the 3.50%-3.75% range and signaling patience on further cuts, the narrowing rate differential between the dollar and euro is shifting forex dynamics.

Technical analysts note that EUR/USD must clear resistance at the 1.1500 handle to confirm a sustained bullish trend. The pair has been consolidating in a range as traders position for the June 5 ECB policy decision, which will be the first critical test of whether the central bank follows through on market expectations.

Inflation Persistence vs. Transitory Shock Debate

The central question facing ECB policymakers is whether the energy-driven inflation spike will prove temporary or become entrenched in broader price dynamics. ECB board member Piero Cipollone warned on May 6 that "the chance of a rate hike has risen as inflation pressures are high," even as wage negotiation data showed pay demands had not yet accelerated significantly.

Bundesbank President Joachim Nagel went further, stating publicly that the ECB "may need to act in June if the outlook does not markedly improve." The hawkish rhetoric from traditionally inflation-sensitive council members has reinforced market conviction that rate hikes are coming.

However, some analysts caution that tightening monetary policy into an energy shock could strangle economic growth. The ECB's own projections acknowledge downside risks to GDP expansion, with the eurozone economy expected to grow just 1.0% in 2026 under the baseline scenario.

Broader Market Impact and Safe-Haven Flows

The Iran conflict and resulting energy volatility have driven significant shifts in global capital flows. Safe-haven currencies like the USD/JPY saw dramatic moves earlier in May when the Bank of Japan intervened after the pair breached 160.00, driving a 400-pip selloff.

Commodity markets remain on edge, with gold (XAU/USD) benefiting from geopolitical risk premiums even as rising real yields present headwinds. Morgan Stanley analysts warned last week that oil markets are in a "race against time" as strategic reserves are depleted and no diplomatic breakthrough on Hormuz reopening appears imminent.

What to Watch: June 5 ECB Decision

All eyes now turn to the ECB's June 5 policy announcement and Lagarde's subsequent press conference. Key factors that will influence the decision include:

• May CPI data for the eurozone, scheduled for release May 30
• Oil price trajectory and any progress on Strait of Hormuz negotiations
• Wage growth indicators and second-round inflation effects
• Economic activity data measuring growth momentum heading into Q3

If the ECB delivers a 25-basis-point hike in June as expected, it will mark the first rate increase since the aggressive tightening cycle of 2022-2023, when the deposit rate was lifted from -0.50% to 4.00% before the cutting cycle began in 2025. The policy reversal underscores the extraordinary challenge facing central bank policies navigating energy-driven stagflation risks.

Trading Implications

Currency traders should monitor several key levels as June approaches:

• EUR/USD: Resistance at 1.1500; support at 1.1200-1.1250 zone
• GBP/USD: Watch for spillover effects from ECB policy on broader European FX
• EUR/JPY: Carry trade dynamics shifting as ECB moves toward tightening
• Oil-linked pairs (USD/CAD, AUD/USD): Remain sensitive to energy price swings

The resurgence of inflation pressures after years of central bank efforts to normalize price growth highlights the vulnerability of global economies to geopolitical supply shocks. For forex markets, the divergence and reconvergence of major central bank policies will continue to drive volatility through year-end.