Barely two years after winning its tough battle against soaring prices in the wake of the pandemic and the war in Ukraine, the European Central Bank (ECB) finds itself facing a scenario it had hoped to avoid: the return of inflation. At the start of 2026, our leaders’ main concern was driving growth. But by the end of February, geopolitics had turned everything on its head.

The return of inflation

The military escalation involving Iran and the growing tensions in the Gulf on 28 February have sharply reignited fears over global energy supplies. Disruptions in the Strait of Hormuz, through which nearly 20 per cent of the world’s oil passes, caused crude oil prices to soar. Within a few weeks, the price of a barrel of Brent crude had crossed the symbolic threshold of $100, fuelling a widespread rise in the cost of living and, in turn, production costs across all the economies of the eurozone. This new surge in inflation has placed the ECB in a delicate position, as it had to combat inflation at the risk of further weakening already fragile growth.

The ECB’s decision

Faced with this situation, the ECB decided on 11 June 2026 to raise its key interest rates by 25 basis points. Whilst just a few months earlier the markets had still been anticipating a prolonged period of monetary easing, the central bank judged that the inflationary risk required a swift response. The main instrument used is the deposit rate, which determines the return on funds deposited by banks with the ECB. The difficulty for the ECB lies in the fact that the European economy is already showing signs of weakness. Growth remains below potential in several major eurozone economies, and the riskiest or least profitable investment projects could be postponed.

Towards a de-escalation in Iran?

Tensions in the Middle East have been easing since the announcement of a 60-day agreement. Maritime traffic through the Strait of Hormuz is gradually resuming. Brent crude has fallen back to its lowest level in several months, reaching $80. As fuel prices had begun to fall following the lull in the days leading up to this announcement, households could regain some purchasing power. The coming months could see Europe return to a form of inflation that is more structural than cyclical.

The return of inflation in 2026 serves as a reminder that price stability has recently depended heavily on geopolitics rather than the usual economic mechanisms. For investors, the bond market may temporarily become attractive again. That said, equity markets remain attractive, particularly in light of SpaceX’s impressive initial public offering. Against this backdrop, Finankap’s wealth management advisers factor in market opportunities and government decisions into their asset allocations; to discuss your financial strategies, please contact us!

In a fast-changing world, Finankap is here to bring your aspirations to life.