ECB signals higher inflation forecast as Iran conflict strengthens case for June rate hike

The European Central Bank is preparing to raise its inflation forecasts at next month’s policy meeting, as rising energy prices linked to the Iran conflict strengthen expectations of a June interest-rate hike across the eurozone.

ECB President Christine Lagarde said on Sunday that the central bank’s March inflation projection of 2.6 per cent for 2026 would probably be revised when policymakers meet in June, reflecting a worsening inflation outlook since the outbreak of hostilities involving Iran.

Speaking on Italian talk show Che Tempo Che Fa, Lagarde said the situation had “evolved” significantly since the ECB published its last economic projections.

Her comments reinforce growing signals from ECB officials that policymakers are increasingly leaning toward a rate increase at the June 10-11 meeting, particularly if elevated energy prices continue to feed through into consumer inflation and business costs.

More from Business

ECB Governing Council member Martin Kocher told Bloomberg on Sunday that inflation is now likely to be higher this year than previously anticipated, with the conflict adding fresh pressure on fuel and transportation costs across Europe.

The remarks come as financial markets reassess expectations for European monetary policy after oil prices surged following the escalation of tensions between the United States and Iran earlier this year. Concerns over disruptions to shipping through the Strait of Hormuz — a critical route for global energy exports — have intensified fears that higher fuel costs could trigger broader inflationary pressures across the eurozone economy.

Although US President Donald Trump said on Saturday that a peace agreement with Iran had largely been negotiated, details of any potential deal have yet to be announced, leaving uncertainty elevated in global energy markets.

Lagarde declined to indicate whether the ECB was now firmly on course for a rate increase next month, saying policymakers would continue to assess incoming economic data before making a final decision.

“The current situation is so uncertain, we have to look at all the data available, assess how the economy is going to develop over the course of next quarters, how to determine whether action is needed, and what impact it will have in the medium term,” she said. “Our target is 2 per cent medium term.”

Economists and investors broadly expect the ECB to raise rates by a quarter percentage point in June, with several policymakers suggesting that such a move may become increasingly unavoidable in the absence of a durable peace agreement between Washington and Tehran.

The ECB’s updated economic projections due next month are expected to play a central role in shaping the final policy decision, particularly after inflation had only recently returned to the central bank’s 2 per cent target before geopolitical tensions reignited concerns over price stability.

Despite the uncertainty, Kocher said recent data suggested the eurozone economy had remained relatively resilient in recent months, even as growth weakened in the first quarter and businesses grappled with volatile energy markets.