Meeting of 10-11 June 2026

1. Review of financial, economic and monetary developments and policy options

Financial market developments

Ms Schnabel started her presentation by noting that, since the Governing Council's previous monetary policy meeting on 29-30 April 2026, euro area financial markets had been torn between two competing developments: the unresolved conflict in the Middle East and the global artificial intelligence (AI) boom. The continued disruption to shipping in the Strait of Hormuz had reinforced expectations that oil prices would remain higher for longer, despite markedly lower near-term oil prices. Inflation fixings had declined from their high April readings but continued to hover above 3% for 2026 and above 2% for 2027. In tandem with oil prices, ECB rate expectations had moderated somewhat. However, markets still priced in around three interest rate hikes overall, while the median response in the ECB Survey of Monetary Analysts was an expectation of only two hikes. Although the war was weighing on growth expectations in the euro area and globally, investors’ risk appetite had remained strong. A key underlying factor had been renewed optimism about AI and strong momentum in AI-related investment. As a result, euro area equity markets had recovered close to pre-war levels, and corporate and sovereign bond spreads remained narrow. Overall, financial conditions had remained broadly unchanged since April 2026 but remained tighter than before the start of the Middle East war. 

Near-term oil prices had declined markedly from the peak reached at the time of the Governing Council's April monetary policy meeting. Brent crude oil prices had fallen from USD 118 to about USD 94 per barrel and had been hovering around that level since late May. At the same time, futures prices over longer horizons had remained largely insulated from the pronounced volatility observed in near-term contracts, with the latest futures curve even somewhat above the April curve and significantly above the levels recorded before the outbreak of the conflict. Gas prices had edged higher since the April meeting and continued to trade at around 50% above their pre-war levels. 

The impact of the Middle East conflict had extended beyond crude oil and gas prices. Since the start of the war, the prices of refined products such as petrol, diesel and jet fuel had increased by around 40-45%, significantly more than the price of oil. Prices of fertiliser-related products and plastics had also increased sharply, suggesting that higher energy costs were feeding into broader inflation by affecting downstream product prices. Food prices were expected to remain slightly higher relative to pre-war expectations and were also subject to some upside risks due to the “El Niño” event.

The shifts in the oil futures curve had been mirrored in market-based inflation expectations. Inflation compensation (excluding tobacco) for 2026 and early 2027 had declined from the peaks at around the time of the Governing Council's previous monetary policy meeting. For later horizons, inflation fixings remained close to their April 2026 levels. This suggested that investors continued to expect the inflationary effects of the energy price shock to persist beyond the initial phase of the conflict, likely reflecting the expected pass-through from energy costs to other components of the pricing chain. Medium-term inflation compensation (excluding tobacco) – the one-year inflation-linked swap rate two years ahead – had increased by around 30 basis points following the outbreak of the war, driven partly by inflation risk premia, and stood somewhat above 2%. Longer-term inflation expectations remained broadly anchored, with only a small upward shift in five-year inflation compensation five years ahead. 

Risks to the inflation outlook over the medium term had shifted markedly to the upside since the outbreak of the war in the Middle East. According to risk-neutral options prices, markets assigned a 45% probability to inflation being above 2.5%, on average, over the next two years. By comparison, the probability of inflation being below 1.5% was assessed to be less than 15%. Interest rate markets were also pointing to upside risks, but uncertainty surrounding the policy path had moderated somewhat over the weeks preceding the current meeting and remained less pronounced than during the 2022-23 inflation spike. Hence, despite high uncertainty surrounding the macroeconomic outlook, the ECB’s reaction function appeared to be well understood, thus containing rate volatility.