Meeting of 9-10 September 2026
The ECB reported that rising energy prices, driven by geopolitical tensions and supply constraints, have pushed inflation expectations higher, prompting markets to price in additional rate hikes.
Since the ECB’s July 2026 meeting, euro area financial markets have been shaped by energy price volatility, with long-term yields rising amid a resilient macroeconomy. Persistent high energy prices, exacerbated by US-Iran hostilities and limited refining capacity, have driven up diesel and gas prices to multi-year highs. Concerns over food inflation, fueled by a strong El Niño event and European heatwaves, have further intensified price pressures. Market expectations for inflation and policy rates have surged, with December 2026 inflation fixings jumping sharply and the ECB’s terminal rate now expected to exceed 3% for the first time in this cycle.
The ECB noted that global long-term yields have climbed, particularly in the US, due to high issuance, fiscal uncertainty, and inflation concerns. In the euro area, the nominal OIS yield curve has shifted higher, with front-end moves driven by inflation compensation and policy expectations, while the longer end reflects elevated real term premia. A decomposition of euro area ten-year OIS rates shows domestic factors—such as improved macroeconomic conditions and ECB policy reassessments—have been the primary drivers, with US spillovers accounting for only 20% of term premium variations.
Euro area sovereign bond markets have remained stable, with spreads over OIS rates broadly unchanged since the July meeting, indicating no broad reassessment of credit risk. The coordinated intervention by the US and Japan to support the yen led to a sharp appreciation of the Japanese currency, while the euro strengthened against the US dollar. Euro area equity markets have risen on positive macroeconomic data, strong corporate earnings, and AI optimism, though concerns persist about AI-related leverage and potential crowding-out effects in bond markets.
ECB Executive Board member Isabel Schnabel highlighted that financial conditions in the euro area have tightened modestly since July, driven by higher long-term nominal and real rates and the euro’s appreciation. These factors have only been partially offset by easing from risk assets. Executive Board member Philip Lane emphasized that the Middle East conflict’s energy shock continues to fuel persistent inflation pressures, with oil prices at $97 per barrel and European gas prices at €73 per MWh—17% higher than in July.