ECB Officials Warn Iran War Could Keep Inflation Persistently High
nashnova research
ECB Governing Council member Olli Rehn warned that the Middle East conflict risks becoming a war of attrition, keeping eurozone inflation stubbornly above the 2% target; markets now price a September rate hike at over 95%, as Europe faces an energy-driven re-inflation test.
What did Rehn say, and why now?
Olli Rehn, Governor of the Bank of Finland and ECB Governing Council member, told the Financial Times that U.S.–Israeli military operations against Iran could drag into a prolonged war of attrition, with energy prices pushing eurozone inflation higher for an extended period.
This means → his stance has shifted decisively hawkish — from emphasizing growth-downside risks to prioritizing inflation control.
His key quote: "We cannot afford any cost-of-living crisis in Europe."
How certain is a September rate hike?
Markets price an ECB 25-basis-point hike on September 10 at over 95%, which would lift the benchmark deposit rate from 2.25% to 2.5% — the highest since March 2025.
Investors have also fully priced in another 25 bp hike to 2.75% by February next year.
Rehn stopped short of explicitly endorsing a September move but called market pricing "understandable"; Executive Board member Isabel Schnabel publicly called for a hike last week. In plain terms = hawkish support inside the Governing Council is broadening, and a September hike is all but locked in.
Why is energy the core driver?
Brent crude has climbed back above $90 a barrel, up roughly 13% from early August and about a quarter higher than before the conflict erupted in late February.
The Strait of Hormuz — the chokepoint through which roughly a fifth of the world's oil shipments pass — is nearly shut to commercial traffic, the primary force behind the oil-and-gas price surge.
This means → the inflation driver is not overheating demand but a supply shock — as long as the strait remains effectively closed, energy costs stay elevated.
Where do inflation numbers stand now?
Markets expect eurozone August inflation to jump from 2.9% in July to 3.3%, having stayed above the ECB's 2% medium-term target continuously since March.
In plain terms = inflation has been running above target for more than half a year, and it is accelerating, not falling back.
Rehn noted there are no signs yet of a wage–price spiral (wages rise → firms raise prices → wages rise again), but cautioned that inflation surges after both Covid and the start of the Russia–Ukraine war were not captured by forecasts in time — a reason the Council now treats any projection with skepticism.
Can the eurozone economy hold up?
Rehn described the eurozone economy as showing "remarkable resilience" this year, weathering high energy prices and trade friction better than expected, with full-year growth projected at roughly 1.5%–2%.
This reflects the ECB's operating logic: the economy is not yet broken → there is room to tighten monetary policy to fight inflation.
The key variable is whether the Middle East situation turns a corner — if the war of attrition drags on and energy prices stay elevated, that resilience will eventually erode, forcing the ECB into the classic dilemma of fighting inflation versus protecting growth.
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