Stagflation Alert: Iran Conflict Forces ECB Into Two Rate Hikes

The Iran conflict has triggered persistent inflationary pressure across the Eurozone, forcing a hawkish policy shift from the European Central Bank. According to aBloomberg survey, economists now expect the ECB to deliver two 25-basis-point rate hikes in June and September, upgrading from only one prior projected hike.

Driven by soaring energy prices, the Eurozone’s 2025 inflation forecast was lifted from 2.8% to 2.9%. In a stark hawkish signal, ECB Governing Council member Kazimir explicitly stated a June rate hike is all but inevitable. Outgoing Vice President de Guindos delivered a final warning: energy shocks reflect faster in inflation than growth, and markets should never overlook the delayed economic drag from the Iran conflict. He added upcoming prints will stay weak, naming the Strait of Hormuz shipping situation as the critical variable for June’s policy decision.

Balancing stagflation risks, the ECB faces a tough dilemma: geopolitical tensions keep inflation elevated, while the economic outlook deteriorates. Analysts cut the 2026 Eurozone GDP growth forecast to 0.8%. Markets still price in a rate cut in March 2026, reflecting weak long-term economic momentum.