Hormuz disruption reignites ECB rate hike debate ahead of July meeting

The European Central Bank's brief window of relief on inflation has slammed shut. Days after data showed eurozone price growth cooling faster than expected, a resumption of US-Iran hostilities in the Strait of Hormuz has sent energy markets into turmoil and raised the prospect of further ECB rate hikes later this year.

Energy Shock Returns

Oil tanker traffic through the Strait of Hormuz fell sharply this week after Iranian forces struck three commercial vessels, triggering retaliatory US strikes on Iranian military targets. Only 13 tankers crossed the strait on Wednesday, compared with an average of 33 per day over the previous week, according to CNBC. The United Nations' International Maritime Organization urged all vessels to avoid the waterway until safety conditions improve.reuters+2

Oil prices rallied more than 6% this week as investors weighed the risk of a prolonged disruption to crude exports through the strait, which handles roughly a fifth of global oil supply. The escalation undid much of the progress made since the US and Iran signed a memorandum of understanding on June 17 to reopen the waterway.cnbc+1

Inflation Eases — For Now

The flare-up comes against a backdrop of improving inflation data. Eurozone consumer prices rose 2.8% year-on-year in June, down from 3.2% in May and below the 3.0% economists had forecast, according to Eurostat Euronext N.V.. Germany's harmonized inflation rate came in at 2.4%, according to the Bundesbank, driven by a marked decline in energy price growth.tradingeconomics+3

ECB President Christine Lagarde said on June 30 that risks to inflation and growth had become "more broadly balanced" in recent weeks. But accounts of the ECB's June meeting, published on July 9 by Reuters Thomson Reuters Corporation ↗ 0.95%, revealed that staff projections showed inflation remaining above the 2% target into next year even with nearly three rate hikes priced in.econostream-media+2

Rate Hike Calculus Shifts

The ECB raised its deposit rate by 25 basis points to 2.25% on June 11, its first increase in three years. Before the renewed hostilities, markets had largely expected a pause at the July 22-23 meeting, with a further hike deferred to September or October.reuters+2

UBS ↗ 0.42% had cut its oil price forecasts on July 1, expecting Brent to average $84 per barrel in 2026, but warned that the path depended on "the pace of Hormuz normalisation and durability of the US-Iran MoU". ECB policymaker Pierre Wunsch told Reuters in June that he would support a July hike if inflation data worsened, adding that a Brent price above $100 per barrel could force the bank's hand.reuters+2

With the ECB's next decision due July 23, the renewed conflict has placed policymakers in a bind: act too soon and risk tipping the eurozone into recession, or wait and allow energy-driven inflation to become entrenched once more.