ECB’s Rehn warns of ‘conflict of attrition’ ahead of rate hike

New research from the European Central Bank published Tuesday found that the recent surge in eurozone inflation has been driven "almost entirely" by adverse energy supply shocks stemming from the war in Iran, lending support to the ECB's decision to raise interest rates in June for the first time in nearly three years.

Energy, Not Stimulus, Behind Latest Price Surge

In a blog post, ECB economists Kristina Barauskaitė Griškevičienė and Claus Brand compared the current inflation episode with the one that followed Russia's full-scale invasion of Ukraine in 2022, analyzing variables including pandemic-era demand and supply imbalances, energy supply disruptions, and fiscal and monetary policy measures.reuters

"Our estimates suggest that the current increase in headline inflation has so far, until end of May 2026, been driven almost entirely by adverse energy supply shocks," the researchers wrote. By contrast, the 2021–22 bout of high inflation was also fueled first by monetary stimulus and later by fiscal stimulus — a distinction the ECB says supports its "more measured" policy response this time around.reuters

The ECB raised its deposit facility rate from 2.00% to 2.25% at its June meeting, its first hike since 2023, after energy costs surged following disruptions tied to the Iran conflict. The bank's June projections put eurozone inflation at 3.0% for 2026, 2.3% in 2027, and 2.0% in 2028.global.morningstar+1

Rehn Warns of Prolonged Conflict Risk

Separately on Tuesday, ECB Governing Council member Olli Rehn warned in a Financial Times interview that the central bank must prepare for an extended "conflict of attrition" in the Middle East. "We must show no complacency in the face of these inflationary pressures," Rehn said, pointing to energy prices driven up by the war and the near closure of the Strait of Hormuz shipping channel.ft+1

Rehn's comments came ahead of August inflation data expected to show consumer prices in the 21-country eurozone rising to 3.3%, and just over a week before the ECB's next policy meeting on Sept. 10. According to Reuters Thomson Reuters Corporation ↘ 4.69%, policymakers are ready to raise the deposit rate again to 2.50% at that meeting, though they have little appetite to signal further tightening beyond it.wtaq+1

Looking Ahead

Most economists had expected the Iran conflict to wind down over the summer, but fighting has persisted and a collapsed U.S.-Iran ceasefire in recent months pushed oil prices higher. Financial markets are now pricing in one or two additional rate hikes before year-end. The ECB's staff will present updated economic projections at the September meeting, giving policymakers a fuller picture of how the conflict continues to reshape the eurozone's inflation outlook.linkedin+2