The European Central Bank (ECB) is expected to leave its key interest rates unchanged this coming Thursday, but the “clouds” that have begun to gather over the inflation outlook, following the renewed hostilities in the Middle East, are fueling uncertainty about its decisions starting in September and beyond.

After raising its interest rates by 25 basis points on June 11 to curb inflation, the ECB kept its options open for the future, based on the position that decisions would be made at each meeting based on the available data. Christine Lagarde had even noted at the press conference that this particular move did not mark the beginning of a new cycle of interest rate hikes.

Future decisions, as had been emphasized, were linked primarily to the course of the war in Iran and to how long the Strait of Hormuz would remain closed. A few days after the ECB meeting, a provisional U.S.-Iran agreement was announced to end the war, lasting two months, which also provided for the gradual reopening of the Strait of Hormuz to shipping. Indeed, ship traffic through this critical waterway subsequently increased significantly, causing Brent crude oil prices to plummet from over $90 per barrel before the agreement to $72, which is close to the levels seen before the war began on February 27.

Provided that the interim agreement was upheld and, at the same time, the planned negotiations between the U.S. and Iran led to a more lasting peace in the region—something that was, however, considered highly uncertain from the outset— — bringing inflation down to the 2% target would be greatly facilitated, and the ECB could limit itself to another small rate hike or even avoid any further increases.

However, the memorandum of understanding signed by U.S. President Donald Trump and his Iranian counterpart, Masoud Pezeskian, has been canceled following Tehran’s attacks on ships passing through the Strait of Hormuz and the subsequent U.S. airstrikes on Iranian targets. Brent crude prices have surged in recent days to $85 per barrel, about 20% higher than in early July.

The ECB will monitor how energy prices evolve and how they will affect inflation—through their spillover into the prices of other goods and services—before making its decisions. Of particular concern in this regard is the IMF’s warning that the factors that have prevented a more dramatic surge in oil prices to date are running out, such as the large-scale use of strategic reserves, increased production by countries outside the Persian Gulf, and restrained demand from China.

In any case, the July inflation figures—to be released by Eurostat at the end of the month—and the August inflation figures, expected on September 1, just a few days before the ECB’s meeting on September 10. The ECB will also take into account the preliminary data on Eurozone GDP for the second quarter, which will be released on July 30 and are always factored into interest rate decisions. Eurozone GDP had declined by 0.2% in the first quarter compared with the fourth quarter of 2025, due to the sharp contraction in Ireland (excluding Ireland, GDP rose by 0.1%).

Frankfurt is on alert, with Bundesbank President Joachim Nagel setting the tone last Wednesday. Although he hinted that a further interest rate hike is not necessary this month, saying that rates are “at an appropriate level,” he added: “The new outbreak of military conflict in the Middle East and the fresh rise in oil prices underscore that the situation remains extremely volatile and uncertainty is correspondingly high. It remains appropriate to respond with caution, but to act decisively if necessary… The development of energy prices is a decisive factor in determining the outlook for inflation. Monetary policy will maintain its cautious stance.”

Source: APE-MPE