Since the Governing Council's monetary policy meeting on June 10-11, 2026, financial markets have been driven by deepening Middle East conflict and developments around artificial intelligence, officials noted. Oil prices have remained highly sensitive to geopolitical developments, with vessel traffic through the Strait of Hormuz temporarily increasing but remaining well below historical norms. Since the latest conflict escalation, traffic has declined again, underscoring persistent disruptions to global energy supply chains.
Brent crude oil prices briefly fell to pre-war levels following a preliminary peace agreement announcement, but current prices remain well below their recent peaks and below levels prevailing at the time of the June meeting. Longer-dated oil futures contracts have remained elevated throughout the volatility, pointing to persistent upward pressure on prices with risks tilted to the upside. Crack spreads — the differences between wholesale petroleum product prices and crude oil prices used to estimate refining margins — have reached all-time highs, as tight inventories and constrained refining capacity due to Middle East and Russian facility destruction have pushed up petrol and diesel prices.
Food prices have also risen notably since the June meeting, with weather-related risks and El Niño conditions expected over coming months. European heatwaves are likely to add pressure on food production and prices. Market-based inflation fixings have remained broadly unchanged at shorter horizons but have moved up from mid-2027 onwards, remaining visibly above 2 percent over the medium term. The balance of risks over the next two years is tilted to the upside, while long-term inflation expectations remain anchored.
The rise in nominal yields since the Middle East conflict onset has reflected both higher inflation compensation and higher real rates, with inflation compensation dominating over shorter horizons. Euro area overnight index swap forward curves remain close to levels at the time of the June meeting, with markets pricing in a policy hike in September 2026 almost fully and an additional hike fully priced in by February 2027. Survey participants continue to foresee only one further rate hike in 2026, though that survey only partly reflected the recent conflict re-escalation.
The euro has depreciated against the US dollar, remaining well below levels prevailing at the beginning of the Middle East war. Exchange rate movements since May 2026 have been closely linked to shifts in short-term rate differentials. Equity markets have continued higher, supported by positive earnings expectations and optimism around artificial intelligence.
