ECB on the Verge of a Second Rate Hike: Why the Euro Is Balancing Between Inflation and Recession

Author and Editor-in-Chief: Vitaly Kisterny04.09.2026 20:15:00

On September 10, 2026, the European Central Bank will most likely raise its key rate to 2.50% — the second hike this year.

Markets are pricing in the probability of this move at more than 95%. Eurozone inflation accelerated in August to 3.3% from 2.9% in July, while the energy shock from the war in the Strait of Hormuz continues to put pressure on prices.

However, behind this seemingly obvious decision lies a deep dilemma. The eurozone economy is balancing on the brink of recession, and political crises in France and Germany are adding further uncertainty. The euro, which at the end of August had risen above $1.17, slipped below $1.16 by early September. What happens next depends on what the ECB says after the rate hike.

Photo: Pixabay / euro. Illustrative photo

The Energy Shock Returns: Europe Caught in a Trap

The main reason the ECB is forced to act is energy. The war in the Strait of Hormuz and a new round of conflict between the United States and Iran have led to a sharp spike in energy prices. Eurozone inflation, which stood at 2.9% in July, accelerated to 3.3% in August. At the same time, according to ECB estimates, up to 90% of the inflation increase in 2026 is tied precisely to negative energy supply factors.

The situation is aggravated by the fact that Europe has bet on a peace deal that was supposed to open the Strait of Hormuz and bring down energy prices. However, those plans were never meant to materialize. Gas storage facilities in Europe are only 65% full — the lowest level in 15 years. Prices have soared to their highest levels since the beginning of 2023. As analysts note, the situation is painfully reminiscent of the events of 2022, when the energy crisis sent the euro below parity with the dollar.

The Rate Hike: An "Insurance Move" or the Start of a New Cycle

The rate hike on September 10, according to analysts, is an "insurance" type of step. The ECB wants to reinforce its reputation as an inflation fighter and prevent the energy shock from spilling over into wages and prices through secondary effects.

However, behind this decision lies a fundamental dilemma. A deposit rate of 2.50% is still in the "neutral" zone. If the ECB decides to raise it higher, that would mean a shift to a genuinely restrictive policy. But can the eurozone economy withstand such a tightening? The question remains open.

Political Crises: France and Germany Add Fuel to the Fire

In addition to the energy shock, the euro is under pressure from political uncertainty. Elections in France are approaching, and Germany is grappling with internal economic problems. The French debt crisis and the ideas of radical politicians about canceling debt to the ECB create additional risks for the common currency.

As analysts note, the situation in the eurozone is complicated by the fact that the ECB has to balance between fighting inflation and preventing financial fragmentation. Rising bond yields in troubled countries are tightening financial conditions, and the ECB must be careful not to "add fuel to the fire."

What comes next: the main question of September

The coming days will be decisive for the euro. If the ECB raises the rate but signals that this is the last hike in the cycle, the euro may remain under pressure. If, however, the regulator hints at the possibility of further tightening, the euro could receive support.

For now, markets are assessing the likelihood that the ECB will continue to raise rates even after September. However, as experts note, "in much of Europe's public sector, where budgets are already bursting at the seams and bond yields are rising, the ECB is unlikely to want to risk provoking a recession."

One thing can be said for certain: the euro finds itself caught between two fires. Inflation demands tightening, while the economy demands softness. And how the ECB handles this balance will determine the fate of the common currency through the end of the year.

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