ECB’s Panetta warns inflation to stay above 3% until 2027

The European Central Bank faces renewed pressure to tighten monetary policy after the collapse of the US-Iran ceasefire sent oil prices surging and raised fresh questions about the trajectory of Eurozone inflation.

ECB Governing Council member Fabio Panetta said on Tuesday that inflation in the euro area is "currently hovering around 3% and is expected to remain above that level until early 2027," warning that markets may be underestimating the risks. His comments came just a week before the ECB's next policy meeting on July 23, where traders are weighing the possibility of a second rate hike this year.luxtimes+2

Ceasefire Collapse Reshapes Outlook

On July 8, President Trump declared the fragile US-Iran ceasefire "over" after Iranian attacks on commercial vessels in the Strait of Hormuz. The US military struck approximately 140 Iranian targets along the coastline in response. Oil prices jumped roughly 7% on the day, with Brent crude rising above $76 a barrel for the first time in two weeks, before retreating as mediators sought to prevent further escalation.cnbc+5

The renewed hostilities threaten to undo progress made since the June 11 ECB rate hike, when the bank raised its deposit facility rate by 25 basis points to 2.25% — its first increase since 2023. That decision was driven by Eurozone inflation hitting 3.2% in May, well above the ECB's 2% target.europa+3

Data Dependence and the July Meeting

June inflation data offered some relief, dropping to 2.8% — below expectations of 3.0%. A host of ECB policymakers said there was no rush to follow up with another hike in July, with the bank preferring to wait for more data.tradingeconomics+2

But the renewed conflict has complicated that calculus. Governing Council member Martin Kocher said on July 1 that the ECB's next decisions "will be either hike or hold". ECB Chief Economist Philip Lane said second-round effects would "probably take some time" to materialize, suggesting the bank should first observe how energy price increases feed through into food and services inflation.bloomberg+1

Markets Price Further Tightening

ECB President Christine Lagarde told the European Parliament in late June that the bank had "yet to observe any signs of inflation expectations becoming unanchored or secondary effects" that would justify a stronger response. Markets have priced in one to two additional rate hikes by year-end, with the deposit rate expected to reach around 2.50%.reuters+1

The ECB's next policy meeting on July 23 will test whether policymakers view the latest oil price spike as temporary or as evidence that the inflation overshoot will persist longer than their June projections assumed.