Tensions in the Strait of Hormuz between the U.S. and Iran have reignited concerns over oil supply and volatility in energy prices, prompting the European Central Bank (ECB) to reconsider its upcoming interest rate decision. The renewed hostilities have pushed Brent crude oil prices back above $85 per barrel, after having recently fallen close to pre-war levels around $70. With the eurozone importing a majority of its energy needs, this surge in oil prices poses a significant challenge for policymakers balancing inflation control against economic growth risks.

Earlier this year, the ECB had reduced its key deposit rate from 3% to 2% across four rate cuts during the first half of 2025, but last month it reversed course with a 25 basis point hike to 2.25% amid rising inflation pressures. Headline inflation had peaked at 3.2% in May, driven in part by energy costs, before easing slightly to 2.8% in June. Despite core inflation remaining manageable at 2.4%, the jump in energy prices linked to geopolitical conflict has shifted expectations, casting doubt on whether the ECB will hold rates steady at its July 22 meeting.

Complicating the ECB’s decisions is the absence of fresh eurozone inflation and GDP data before the next policy meeting, leaving officials to weigh risks amid considerable uncertainty. Market analysts from ING highlight that while U.S. inflation appears to be easing, Europe’s inflation peak may not yet have been reached, especially if energy prices continue climbing. Investors have scaled back anticipation of an immediate ECB rate hike but still foresee two more 25 basis point increases by spring 2027, which would bring the deposit rate to 2.75%.

ECB officials emphasize a cautious but vigilant approach moving forward. Bundesbank President Joachim Nagel acknowledged the highly volatile developments and urged readiness to act decisively if conditions warrant. Austrian central bank chief Martin Kocher noted no clear evidence of second-round inflation effects from the energy cost surge but stressed the importance of aligning monetary policy with inflation expectations. The evolving geopolitical backdrop is thus complicating the ECB’s balancing act between managing inflation risks and supporting an economy that contracted slightly in Q1 2026.