Sources told Reuters that European Central Bank policymakers are likely to raise interest rates at least twice this year. They said the first increase could come in June if there is no resolution to the Iran conflict.
The ECB left rates unchanged at its April meeting. It indicated it is discussing tighter policy in response to rising energy prices.
Policy Signals And June Timing
Anonymous sources said they expected a June move if disruption to traffic continues and spot Brent stays above $100 a barrel. Lagarde said there were lengthy talks about a rate rise, while a source said June was being considered rather than April.
A separate source said future rate rises depend on how the US-Iran conflict develops. The source added that de-escalation could lower oil prices and improve the Eurozone’s economic outlook.
Looking back to this time in 2025, we were preparing for the European Central Bank to hike rates at least twice, starting in June. This expectation was heavily tied to the unresolved Iran conflict, which was keeping Brent crude oil prices above $100 a barrel. The sentiment among policymakers was that tightening was necessary to control surging energy costs.
The situation has changed significantly since those discussions. The de-escalation of the US-Iran conflict in late 2025 provided immediate relief to energy markets, and the ECB only proceeded with a single rate hike in June 2025 before pausing. That anticipated series of aggressive rate increases never happened as inflationary pressures from oil began to fade.
Market Focus Shifts To Cuts
Today, Brent crude is trading around $78 a barrel, a far cry from the crisis levels we saw last year. Recent Eurostat data shows headline inflation in the Eurozone has fallen to 3.1%, down from over 7% in early 2025. With the ECB’s key interest rate holding at 4.75% since last June, the market is no longer pricing in hikes, but is now focused on the timing of potential cuts.
Given this shift, traders should consider positioning for a more dovish ECB in the coming months. Derivatives like interest rate swaps, which would profit from falling rates, are becoming more attractive. The debate is no longer about how high rates will go, but when the first 25 basis point cut will be delivered.
Volatility in the bond market is a key factor, as the timing for a rate cut remains uncertain despite slowing inflation. We’ve seen options pricing on Bund futures increase as traders hedge against the ECB waiting longer than expected to ease policy due to stubborn services inflation. This suggests strategies that benefit from this uncertainty, not just a direct bet on lower rates, could be prudent.
This environment also has clear implications for the euro, which has weakened against the dollar as rate cut expectations build. Traders may find value in options that protect against or speculate on a further decline in the EUR/USD exchange rate. The primary risk remains a sudden flare-up in geopolitical tensions or an unexpected inflation report that could delay the ECB’s pivot.
