Falling oil prices push economists to predict ECB’s June hike was its last

Falling Oil Prices Cool ECB Rate Hike Expectations

The sharp decline in crude oil prices following the reopening of the Strait of Hormuz has prompted economists to scale back expectations for further European Central Bank rate increases, with several major forecasters now predicting the ECB’s June hike will be its last.

Forecasters Shift to ‘One and Done’

Oxford Economics said on Thursday that it no longer expects additional rate increases after the ECB’s 25 basis-point hike on June 11 — the first since 2023 — citing the abrupt fall in energy prices stemming from the U.S.-Iran agreement as having shortened the inflationary spike cycle, according to Bloomberg. Capital Economics similarly revised its outlook, writing that its “new base case is that the ECB leaves its deposit rate unchanged for the rest of this year, before cutting it in 2027”.bloomberg

The shift marks a dramatic reversal from just weeks earlier, when a Reuters poll found more than 60% of economists anticipated at least one additional hike in 2026, likely in September. Before the U.S.-Iran deal was announced, markets had been pricing in as many as three more rate increases for the year.reuters

Oil’s Rapid Retreat

Brent crude has fallen sharply since the U.S. and Iran signed a memorandum of understanding on June 17 to end hostilities and reopen the Strait of Hormuz. By June 25, Brent had dropped to around $74 per barrel, down more than 23% over the past month and approaching pre-war levels. The strait’s near-total blockade during the conflict had removed an estimated 14 million barrels per day from global supply.nbcnews

The euro fell to a one-year low against the dollar on expectations that the ECB would turn more dovish, according to Yahoo Finance.yahoo

Central Banks in Wait-and-See Mode

The recalibration extends beyond Europe. The U.S. Federal Reserve held rates steady at its June meeting under new Chair Kevin Warsh, though nine of 19 policymakers projected at least one hike by year-end. Markets had been pricing in a Fed rate increase as soon as September, but with oil prices continuing to decline, some analysts argue that calculus may shift.youtube

Still, uncertainty remains. The U.S.-Iran deal extends the ceasefire for only 60 days while a permanent agreement is negotiated, and analysts caution that the most difficult phase — implementation — lies ahead. “The slide in crude prices is driven entirely by sentiment,” Vandana Hari of Vanda Insights told Al Jazeera, warning that the market may be pricing in a best-case scenario for the normalization of oil flows.npr