Traders cut ECB rate hike expectations to below 25 basis points in 2026

Just weeks ago, markets were pricing in up to three more European Central Bank rate hikes for 2026. Now they’re not even expecting a full quarter-point move for the rest of the year.

What happened, and why it matters

On June 11, the ECB raised its three key interest rates by 25 basis points, its first hike since 2023. The deposit facility rate moved to 2.25%, main refinancing operations to 2.40%, and the marginal lending facility to 2.65%. Those new rates took effect on June 17.

The hike was a direct response to inflationary pressures driven by Iran-related tensions and disruptions in the Strait of Hormuz. Eurosystem staff projections in June forecast headline inflation at 3.0% and growth at a tepid 0.8%, numbers that made the case for tightening fairly straightforward.

Then oil prices fell sharply in late June as Middle East peace negotiations advanced.

Analysts at Oxford Economics have stated they no longer expect additional ECB rate moves for the remainder of 2026. Markets have followed suit, cutting rate hike expectations to below 25 basis points total for the rest of the year.

The energy-inflation feedback loop

Europe’s inflation problem was imported. When the Strait of Hormuz situation escalated, energy prices spiked, headline inflation followed, and the ECB had little choice but to hike. The 3.0% inflation forecast reflected a commodity shock, not an overheating economy. Growth at 0.8% made that painfully clear.

What this means for investors

European equities stand to benefit. Lower rate expectations reduce borrowing costs for companies and make stocks relatively more attractive compared to bonds. The previous expectation of multiple hikes had been a headwind for risk assets across the eurozone, and that headwind is now dissipating.

Bond markets are adjusting in real time. Traders who had positioned for further tightening are unwinding those bets, which pushes bond prices higher and yields lower.

The ECB went from cutting rates through much of 2024 and 2025, to hiking in June 2026, to being expected to do nothing for the rest of the year, all within a span of months.

Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.