ECB's Muller: Inflation to Accelerate in the Coming Months

Key Takeaways

• Muller links inflation rise to US‑Iran conflict and energy prices
• ECB likely to hike rates in June; market sees 77% probability
• Two hikes may be needed if war continues and Brent stays high
• Long‑term yields already tightened financing, but effect fades if rates stall
• Total tightening expected to reach 70 basis points by year‑end

Pulse Analysis

The euro area is confronting a new inflationary shock as geopolitical tensions flare in the Middle East. The US‑Iran confrontation has pushed oil markets into volatility, with Brent crude hovering near historic highs. Energy‑intensive economies across the eurozone are feeling the ripple effect, as higher fuel costs feed into consumer prices and industrial input costs. Analysts now argue that the inflation dip seen earlier this year was a temporary reprieve, and the underlying price pressures could re‑accelerate unless the conflict de‑escalates.

Within this backdrop, the European Central Bank’s policy calculus is shifting toward pre‑emptive tightening. Madis Muller highlighted that long‑term bond yields have already risen, providing an "advance effect" that temporarily eases price pressures. However, he warned that this effect diminishes if policy rates remain static for too long. Market pricing reflects this uncertainty, with a 77% probability of a June rate hike and expectations of a cumulative 70‑basis‑point tightening by the end of 2026. The consensus among ECB governors suggests at least two hikes may be required if energy prices stay elevated, underscoring a more hawkish stance than previously anticipated.

For investors and corporates, the prospect of higher rates translates into tighter financing conditions and a stronger euro, which could dampen export competitiveness but also curb imported inflation. Bond portfolios may see yields rise further, while equities exposed to energy‑intensive sectors could face margin pressure. The evolving policy outlook reinforces the need for risk‑adjusted strategies that account for both macro‑geopolitical risks and the ECB’s likely pivot toward a more aggressive rate‑raising trajectory.