ECB Records High Volatility and Persistent Energy Shock from the Middle East
According to the ECB's account of its April 29-30 meeting, markets expect the energy price shock to be prolonged, and inflation expectations for 2026 have risen to 3.6%, prompting investors to price in two rate hikes in 2026.
Analytical Article: ECB Minutes from April 29-30 — Quiet Panic in Frankfurt
Author: Independent Financial Analyst
[The Gist]: What's Really Happening
The official wording "the decision to keep rates unchanged was a close call" is a diplomatic euphemism for what actually happened. In the ECB boardroom on April 29-30, 2026, there was effectively a vote that could have led to a rate hike, not a hold.
The minutes, published on May 28, reveal a shocking detail: "Several members noted that the decision was close and they would not have objected to a rate hike at the current meeting had the matter been put to a vote." Let me translate: the ECB stood at the edge of the abyss. And it was held back only by a procedural issue — a rate hike was not officially on the agenda.
Christine Lagarde publicly projects calm. But behind closed doors, chaos reigns. Eurozone inflation surged to 3% in April, up from 2.6% in March. And inflation expectations for 2026 have reached 3.6%. These are not just numbers — they are evidence that markets no longer believe in the "transitory nature" of the energy shock.
Timeline and Context
Let's break it down by date to understand how much the situation has spiraled out of control:
- Early February 2026 — Start of the military conflict in Iran and blockade of the Strait of Hormuz.
- March 19, 2026 — ECB keeps rates unchanged at its March meeting but raises its 2026 inflation forecast from 1.9% to 2.6%.
- April 29-30, 2026 — Meeting where the decision to hold rates is barely passed. Minutes published only on May 28.
- June 11, 2026 — Next ECB meeting. Markets have already fully priced in a 25-basis-point rate hike by this date.
Why this matters: between the April decision and the June meeting, what the ECB feared most happened — the energy shock became persistent. ECB Chief Economist Philip Lane admitted on May 27 that the energy shock spilling over into a broader inflation problem would be a "serious challenge" for the ECB. And ECB Executive Board member Isabel Schnabel, representing Germany, stated bluntly: "Inaction is no longer an option."
Who Wins and Who Loses
Winners:
- US Dollar vs. Euro. The euro is staying afloat only on expectations of an ECB rate hike. MUFG notes that markets have already priced in one 25-basis-point hike in June and nearly a second by September. But if a hike happens and the economy collapses, the euro will still fall. If no hike happens, the euro will crash immediately. It's a no-win situation.
- Short positions on European equities. European stock indices remain near all-time highs despite the energy shock. Isabel Schnabel directly warned: "Buoyant markets in risky assets may indicate some investor complacency." This is a signal: prepare for a correction.
- US energy companies. Every ECB rate hike weakens the euro and strengthens the dollar. Does that make dollar-denominated oil prices more affordable for Europe? No. It makes imports more expensive. US LNG wins.
Losers:
- The European economy as a whole. The ECB is caught between a rock and a hard place. Raise rates — kill the remaining growth. Don't raise — inflation burns savings. GDP forecasts for 2026 have already been cut from 1.2% to 0.9%. And Morgan Stanley expects two rate hikes in 2026, making 0.9% unattainable.
- Floating-rate borrowers in the eurozone. Mortgages, small business loans. The deposit rate is already 2%, and if the ECB hikes to 2.5% (as Deutsche Bank and Morgan Stanley expect), it will be an additional burden.
- High-debt eurozone governments. Italy, Greece, Spain. Rate hikes increase the cost of servicing public debt. That means less money for social programs at a time when the energy crisis is hitting the population.
What the Media Isn't Saying
Here's my key insight that you won't find in Reuters or Bloomberg.
The ECB minutes reveal a hidden threat that no one is talking about publicly: government energy subsidies could reignite inflation a second time.
Quote from the minutes: "Another risk was that governments would offer subsidies to consumers to cope with high energy prices, similar to what happened in 2022, which could exacerbate the inflation problem." The ECB fears a repeat of 2022, when energy subsidies in Germany (€200 billion) and other countries merely postponed the pain without solving the problem, ultimately leading to even higher prices.
Now the situation is worse. In 2022, subsidies cushioned the blow for the population. But they also created moral hazard: governments are not reforming the energy sector, just throwing money at it. Then the ECB is forced to tighten policy to compensate. This is a tug-of-war between fiscal and monetary policy, and the population always loses.
Second hidden fact: China. No one is mentioning that Chinese ships continue to pass through the Strait of Hormuz unhindered (I mentioned this in previous reviews, but here it's key context). The ECB minutes say nothing about the fact that the energy shock is not just about oil prices but also about selective access to the strait. China gets oil at $95. Europe pays $105-110. The 15% difference gives China a huge competitive advantage in manufacturing. This is not reflected in ECB forecasts.
Forecast: Next 30 Days and 90 Days
30 days (through end of June 2026):
- ECB June meeting on June 11: 95% probability of a 25-basis-point rate hike to 2.25%. Markets have already priced this in. The question is not whether they will hike, but how hawkish the signal will be on further action.
- Euro (EUR/USD) will trade in the 1.05-1.08 range depending on the ECB signal. If the signal is hawkish (hint of a second hike in September), the euro could rise to 1.09. If dovish, it could fall to 1.03.
- European equities (Euro Stoxx 50) — a 5-7% correction after the rate hike, as markets have already priced in an optimistic scenario.
90 days (through end of August 2026):
- Probability of a second rate hike in September: 60%. Deutsche Bank, Morgan Stanley, and markets are pricing in two hikes in 2026. ECB's Isabel Schnabel also hints at this.
- If oil stays above $100, the ECB will be forced to act more aggressively. If the conflict resolves and oil falls to $80-85, the hike could be delayed.
- Key indicator: the ECB's March forecast for 2026 inflation was 2.6%. If in June the ECB raises it above 3.2%, that would signal two hikes, not one.
Editorial Forecast
Asset: Euro (EUR/USD)
Direction: Sideways with a downward bias over the next 72 hours
Key levels: Current value around 1.06. Nearest support at 1.0550, resistance at 1.0700.
Confidence level: Medium (55%)
Main risk: If information emerges over the next 72 hours about progress in negotiations on the Strait of Hormuz, oil will fall, inflation expectations will decline, and the ECB could take a more dovish stance, sending the euro down to 1.05. However, if news of escalation comes, the euro could temporarily rise to 1.0750 on expectations of a hawkish ECB.
Editorial opinion. Not investment advice.
— Editorial Team
