ECB May Hike Rates Due to Iran Conflict’s Economic Impact

European Central Bank (ECB) Vice President Luis de Guindos stated on April 13, 2026, that the bank will determine whether to increase interest rates based on the second-round inflationary effects resulting from the U.S.-Israeli war on Iran and its subsequent impact on energy markets.

Speaking in Madrid, De Guindos clarified that the ECB would not be able to mitigate the initial impact of the conflict through monetary policy. However, the institution will closely monitor the secondary effects to decide on future rate movements.

Inflation Risks and Economic Outlook

The ECB has identified significant risks to price stability stemming from the geopolitical crisis in Iran. According to reports from March 19, 2026, the ECB stated that a severe scenario regarding the events in Iran could result in price gains peaking at 6.3% in the first quarter of 2027.

The bank’s projections also indicate that the economy could experience a brief recession during 2026 as a result of these tensions.

Other ECB officials have highlighted specific pressures, with Philip Lane flagging wages and selling prices as key factors in the inflation landscape.

Monetary Policy Stance and Market Expectations

The ECB has maintained a hawkish stance in response to the energy shocks caused by the Iran conflict. President Christine Lagarde indicated on March 25, 2026, that the ECB might need to act even if an inflation surge is not persistent, noting that inaction could be difficult to communicate.

Market participants have adjusted their expectations for rate hikes as the situation evolved:

• Traders previously indicated a 70% probability of a third ECB rate hike by December 2026.
• Following a ceasefire in the Iran war, market predictions shifted on April 9, 2026, to roughly two rate hikes in 2026, a decrease from earlier expectations of more than three.

Despite the ceasefire, markets still anticipate that the ECB will continue to hike interest rates throughout the remainder of the year.

Strategic Focus on Secondary Effects

The distinction between first-order and second-order effects is central to the ECB’s current strategy. While the immediate spike in energy prices is viewed as an external shock that monetary policy cannot prevent, the bank is focused on whether these costs will embed into the broader economy.

Secondary effects occur when the initial price increases for energy and raw materials lead to wider price hikes across other goods and services, or when workers demand higher wages to compensate for the increased cost of living. This cycle is what the ECB aims to prevent to maintain long-term price stability.

The bank’s decision-making process remains data-dependent, weighing the risk of a 2026 recession against the necessity of curbing inflation that could peak in early 2027.