Last Updated on July 12, 2026 by Fiza Khurram
A Rare Reversal: From Rate Cuts to Rate Hikes
For much of the past two years, the story in European monetary policy was one of steady rate cuts as inflation cooled from its post-pandemic peak. That narrative flipped abruptly in mid-2026. The European Central Bank, which had been holding rates steady since March, surprised markets in June by raising its three key interest rates by 25 basis points, lifting the deposit facility rate to 2.25%. The driver was not resurgent domestic demand but an external shock: a war in the Middle East that sent energy prices sharply higher and threatened to push inflation well above target across the eurozone.
The ECB’s Calculation
ECB President Christine Lagarde and the Governing Council said the war was generating inflation pressures robust enough to justify a hike across a range of scenarios. Updated staff projections now see headline eurozone inflation averaging 3.0% in 2026, above the bank’s 2% target, before gradually easing to 2.3% in 2027 and 2.0% in 2028. Growth forecasts were revised down in tandem, with the eurozone economy now expected to expand just 0.8% in 2026, reflecting the drag from higher energy costs on real incomes, business confidence and commodity-dependent sectors.
| Central Bank | Latest Decision | Current Rate | Next Meeting |
| European Central Bank | Raised deposit rate +25bps (June 11) | 2.25% deposit rate | July 24, 2026 |
| Bank of England | Held Bank Rate, 7–2 vote (June 18) | 3.75% | July 30, 2026 |
| U.S. Federal Reserve | Held rate at Kevin Warsh’s first meeting (June 17) | 3.50%–3.75% | Late July 2026 |
The Bank of England’s Balancing Act
Across the Channel, the Bank of England’s Monetary Policy Committee took a more cautious middle path, holding Bank Rate at 3.75% in a 7–2 vote, with two members chief economist Huw Pill and external member Megan Greene pushing for an immediate hike to 4%. UK inflation stood at 2.8% in May, above the Bank’s 2% target, but officials flagged that services inflation, running hotter at 3.7%, is the more persistent concern. The Bank’s own guidance said it expects headline CPI to run a little under 3% in the third quarter and a little over 3.25% by the fourth quarter of 2026 an upward revision driven almost entirely by the energy shock.
The committee has been explicit that monetary policy cannot influence global energy prices directly; instead, its job is to ensure that the economy’s adjustment to higher energy costs does not spiral into a wage-price cycle that keeps inflation elevated long after the immediate shock fades. That framing matters for the next decision, due July 30, which will be accompanied by a full Monetary Policy Report and press conference historically the meetings that produce the largest market moves.
What a Fragile Ceasefire Means for the Rate Path
Much of the near-term forecasting hinges on the durability of Middle East de-escalation. Oil prices fell sharply after an initial ceasefire, easing some inflation pressure, but renewed hostilities have since pushed crude back up, keeping both the ECB and the Bank of England on alert. Economists surveyed by Reuters currently see UK rates ending 2026 anywhere between 3.5% and 4.25%, with close to 40% of forecasters pricing in at least one further hike this year if services inflation stays sticky. Consultancies including Pantheon Macroeconomics and Oxford Economics still lean toward the Bank holding rates through the rest of 2026 and into 2027, while Goldman Sachs has flagged a low hurdle for a summer hike if energy pressures keep building.
Why It Matters for Households and Businesses
For UK borrowers, the practical effect has already shown up in mortgage pricing. Swap rates, the key benchmark lenders use to price fixed-rate mortgages, jumped after the conflict broke out but have since eased slightly as a partial ceasefire took hold, allowing some lenders to trim fixed rates. Still, mortgage brokers are warning the roughly 1.8 million UK homeowners due to remortgage this year not to assume rates will keep falling, given how quickly sentiment has swung from rate-cut expectations to hike risk in the space of a few months. For the eurozone, the immediate concern is growth: a hawkish ECB stance layered on top of an energy shock raises the odds of a shallow recession in energy-import-dependent economies even as headline inflation numbers stay elevated a genuinely uncomfortable combination for policymakers on both sides of the Channel.