ECB Markets Signal Possible Rate Hike to 2.5% by Year-End as Iran War Stokes Inflation

A significant ECB policy re-pricing is underway: markets now expect the ECB to hold at its April 29-30 meeting but pivot to rate hikes as early as June 2026, with a majority of surveyed economists projecting the policy rate reaching 2.5% (50 bps above the current 2.00%) by year-end. The driver is the Iran war's inflationary impact on European energy prices — eurozone 2026 inflation is now projected at 2.6%, above the ECB's 2.0% target, with 2027-2028 forecasts also slightly above target. This marks a dramatic reversal from the ECB's 8-cut easing cycle (June 2024 – June 2025). The ECB faces a difficult dual mandate: holding rates to fight resurgent inflation risks stalling eurozone growth (forecast at only 0.9% for 2026), while cutting risks entrenching a new inflation cycle driven by exogenous energy shocks.