The June Eurosystem staff projections indicated that the May figure was not necessarily the peak. The baseline scenario saw headline inflation reach 3.4% in both the third and fourth quarters of 2026, remain above 3% into early 2027, average 3.0% for 2026 and then decline toward the ECB’s target by 2028.

Lane’s more recent estimate of inflation hovering near 3% therefore broadly reinforced the ECB’s existing forecast path. It also came with an important caveat: a durable geopolitical resolution that lowers energy prices could materially improve the outlook.

Why cheaper oil would not immediately solve the problem

A ceasefire or reopening of the Strait of Hormuz could reduce oil prices, but the effect on inflation would not be instantaneous. Businesses may already have passed higher energy, transport and input costs through their supply chains. Service providers may also adjust prices later than energy markets, creating a lag between the original shock and its impact on underlying inflation.

The ECB’s own data showed that the pressure was not confined to headline energy prices. Inflation excluding energy and food accelerated from 2.2% to 2.5%, while services inflation reached 3.5%, above the 3% level that had been projected. Lane had also warned that oil prices were running above the assumptions in earlier forecasts and that prolonged elevation could have broader effects on the economy.

This is the concern behind Bundesbank President Joachim Nagel’s view that the energy shock remains “in the system.” Even if the immediate oil-price spike fades, the price increases already embedded in contracts and supply chains can take time to unwind.

Why the ECB raised rates—and may consider doing more

The ECB raised its deposit rate by 25 basis points to 2.25% in June as policymakers sought to prevent energy-driven inflation from becoming more persistent. Lane characterized the shock as mid-sized: serious enough to require a policy response, but not necessarily a reason for aggressive tightening.

The logic is preventive. Interest-rate increases cannot produce more oil or reopen a blocked shipping route. They can, however, weaken demand and signal that the ECB intends to return inflation to 2% over the medium term. That signal matters if workers, households and companies begin to expect high inflation to continue and adjust wages or prices accordingly.

The ECB then left rates unchanged in July, underscoring that future decisions would depend on incoming data rather than on a predetermined path. A further hike remains a possibility if energy prices stay high or signs of broader inflation intensify, but a market expectation of a move is not the same as an ECB commitment.

Why higher rates could increase business stress

The case for caution is visible in European company data. In the second quarter of 2026, EU business registrations fell 0.5% from the previous quarter while bankruptcies rose 5.7%. Registrations declined in five of eight sectors, and bankruptcies increased particularly sharply in education and social activities, transport and financial services.

Those figures do not show that ECB policy caused the failures. Companies are also dealing with weak demand, high operating costs, the withdrawal of pandemic-era support and sector-specific problems. The ECB has nevertheless reported that euro-area corporate bankruptcies were above pre-pandemic levels and had broadened across sectors.

Higher interest rates add another pressure by increasing the cost of new borrowing and maturing debt. The effect is likely to be most severe for firms with thin margins, heavy debt loads or a large amount of financing that must be refinanced soon.

The ECB’s central trade-off

The policy choice is difficult because both options carry risks:

• Raise rates further: This could reduce the risk that energy inflation spreads into wages, services and expectations, while protecting the ECB’s credibility. It could also weaken investment and intensify refinancing pressure on vulnerable companies.
• Hold rates steady: This would avoid immediately increasing borrowing costs and give policymakers time to assess whether energy prices are falling. But if underlying inflation continues to rise, the ECB might later need a sharper response.

Geopolitics is therefore the key swing factor. A rapid and durable resolution would reduce the immediate case for additional tightening, although it would not instantly reverse all price increases already passed through the economy. A prolonged or renewed disruption would make Lane’s near-3% outlook more plausible and increase pressure on the ECB to act.

The broader message is that the ECB is not choosing between inflation and business stress in isolation. It is deciding how much financial pressure to accept now to reduce the risk of more persistent inflation later—while waiting for events in energy markets and the Middle East to determine how large the shock ultimately becomes.

The June Eurosystem staff projections indicated that the May figure was not necessarily the peak. The baseline scenario saw headline inflation reach 3.4% in both the third and fourth quarters of 2026, remain above 3% into early 2027, average 3.0% for 2026 and then decline toward the ECB’s target by 2028.

Lane’s more recent estimate of inflation hovering near 3% therefore broadly reinforced the ECB’s existing forecast path. It also came with an important caveat: a durable geopolitical resolution that lowers energy prices could materially improve the outlook.

Why cheaper oil would not immediately solve the problem

A ceasefire or reopening of the Strait of Hormuz could reduce oil prices, but the effect on inflation would not be instantaneous. Businesses may already have passed higher energy, transport and input costs through their supply chains. Service providers may also adjust prices later than energy markets, creating a lag between the original shock and its impact on underlying inflation.

The ECB’s own data showed that the pressure was not confined to headline energy prices. Inflation excluding energy and food accelerated from 2.2% to 2.5%, while services inflation reached 3.5%, above the 3% level that had been projected. Lane had also warned that oil prices were running above the assumptions in earlier forecasts and that prolonged elevation could have broader effects on the economy.

This is the concern behind Bundesbank President Joachim Nagel’s view that the energy shock remains “in the system.” Even if the immediate oil-price spike fades, the price increases already embedded in contracts and supply chains can take time to unwind.

Why the ECB raised rates—and may consider doing more

The ECB raised its deposit rate by 25 basis points to 2.25% in June as policymakers sought to prevent energy-driven inflation from becoming more persistent. Lane characterized the shock as mid-sized: serious enough to require a policy response, but not necessarily a reason for aggressive tightening.

The logic is preventive. Interest-rate increases cannot produce more oil or reopen a blocked shipping route. They can, however, weaken demand and signal that the ECB intends to return inflation to 2% over the medium term. That signal matters if workers, households and companies begin to expect high inflation to continue and adjust wages or prices accordingly.

The ECB then left rates unchanged in July, underscoring that future decisions would depend on incoming data rather than on a predetermined path. A further hike remains a possibility if energy prices stay high or signs of broader inflation intensify, but a market expectation of a move is not the same as an ECB commitment.

Why higher rates could increase business stress

The case for caution is visible in European company data. In the second quarter of 2026, EU business registrations fell 0.5% from the previous quarter while bankruptcies rose 5.7%. Registrations declined in five of eight sectors, and bankruptcies increased particularly sharply in education and social activities, transport and financial services.

Those figures do not show that ECB policy caused the failures. Companies are also dealing with weak demand, high operating costs, the withdrawal of pandemic-era support and sector-specific problems. The ECB has nevertheless reported that euro-area corporate bankruptcies were above pre-pandemic levels and had broadened across sectors.

Higher interest rates add another pressure by increasing the cost of new borrowing and maturing debt. The effect is likely to be most severe for firms with thin margins, heavy debt loads or a large amount of financing that must be refinanced soon.

The ECB’s central trade-off

The policy choice is difficult because both options carry risks:

• Raise rates further: This could reduce the risk that energy inflation spreads into wages, services and expectations, while protecting the ECB’s credibility. It could also weaken investment and intensify refinancing pressure on vulnerable companies.
• Hold rates steady: This would avoid immediately increasing borrowing costs and give policymakers time to assess whether energy prices are falling. But if underlying inflation continues to rise, the ECB might later need a sharper response.

Geopolitics is therefore the key swing factor. A rapid and durable resolution would reduce the immediate case for additional tightening, although it would not instantly reverse all price increases already passed through the economy. A prolonged or renewed disruption would make Lane’s near-3% outlook more plausible and increase pressure on the ECB to act.

The broader message is that the ECB is not choosing between inflation and business stress in isolation. It is deciding how much financial pressure to accept now to reduce the risk of more persistent inflation later—while waiting for events in energy markets and the Middle East to determine how large the shock ultimately becomes.