The European Central Bank must prepare for the possibility that the Middle East conflict could become a prolonged “war of attrition,” which would keep eurozone inflation elevated, according to Governing Council member Olli Rehn. The Finnish central bank governor, speaking in an interview ahead of the September 10 rate decision, cautioned that with energy prices driven higher by the conflict and the near-closure of the Strait of Hormuz, “we cannot afford to be complacent about inflationary pressures,” stressing that “Europe cannot afford a crisis of affordability.” While Rehn stopped short of explicitly endorsing a rate increase this week, he described market pricing for a hike as “understandable” and emphasised that future decisions must be made “meeting by meeting.”

Rehn characterised the Middle East situation as a potentially drawn-out conflict rather than a short-term shock. “We must prepare for a protracted conflict, because the goals of both sides — the Trump administration and the Revolutionary Guard — are truly opposed. There could be a war of attrition in the Middle East.” After a summer ceasefire collapsed, expectations that the Strait of Hormuz would quickly return to normal navigation have faded. On August 30, US forces struck Iranian rocket launchers on islands in the strait — the first military action against Iranian forces in over a month — prompting Tehran to fire missiles at targets inside Jordan. Brent crude has climbed back above $90 per barrel, up roughly 13% since early August and about a quarter higher than before the conflict escalated in late February.

The Finnish governor also noted that the eurozone has shown “remarkable resilience” this year, performing better than feared despite high energy prices and trade tensions. The Bank of Finland currently projects 0.7% growth for 2026, but based on recent monthly data, Rehn estimated Finland's growth this year is “likely in the range of 1.5% to 2%.” He described Finland as a “microcosm” of the eurozone, heavily reliant on “the German export engine” — which economists say is heading toward its strongest growth year since 2022.

Eurozone inflation accelerated to 3.3% year-on-year in August, up from 2.9% in July — the highest reading since September 2023 — according to flash data from Eurostat published on the day of the interview. Inflation has now remained above the ECB's 2% target since March. Energy prices jumped 14.3% year-on-year, up from 10.3% — the fastest increase since the European energy crisis in early 2023. Core inflation, excluding food and energy, eased to 2.4% from 2.5%, while services inflation slowed to 3.0% from 3.3%. Oil prices have risen more than 15% since August, with Hormuz navigation still restricted. Rehn acknowledged that higher energy costs have pushed up headline inflation but said “we have not yet seen second-round effects” — namely, a wage-price spiral. He also cautioned that the initial inflation surge following the Covid pandemic and the Russia-Ukraine conflict was not foreseen, adding that “the Governing Council is being very careful in its judgements right now, and remains self-critical about all forecasts.”

In June, the ECB raised its deposit facility rate by 25 basis points to 2.25%, becoming the first G7 central bank to hike in response to the Middle East energy shock. The 27-member Governing Council will hold its first meeting since the summer break in Berlin on September 10. Market pricing now implies a greater than 95% probability of another 25-basis-point increase, which would lift the deposit rate to 2.50% — the highest level since March 2025. Investors have also fully priced in an additional increase to 2.75% by February. Board member Isabel Schnabel publicly advocated for another hike last week. Rehn, who had previously emphasised growth risks, has now shifted his focus to inflationary pressures — a move market participants read as evidence that support for tightening is broadening within the Governing Council. However, he stopped short of saying more than that the pricing is “understandable,” declining to pre-script the outcome of the September 10 vote.