Meeting of 9-10 September 2026

Ms. Schnabel began her presentation by noting that since the Governing Council's monetary policy meeting on July 22-23, 2026, euro area financial markets had remained focused on energy price developments. There was heightened market attention on the global increase in long-term yields amid a robust euro area macroeconomy. Persistent high energy prices, exacerbated by concerns over higher food price inflation, elevated market expectations for inflation and policy rates.

Energy prices and futures curves surged due to renewed US-Iran hostilities. In Europe, the emphasis shifted from oil to refined products and gas. Gas oil prices, a refined diesel-type product, experienced a significant rise, signaling concerns about limited refining capacity. Meanwhile, European gas prices hit their highest level since early 2023, and low European gas storage levels may further drive up gas prices.

The recent European heatwave and a potential strong "El Niño" event also heightened worries about upward pressure on prices. Food prices had risen sharply over recent months, with international food price inflation contributing to market-based inflation expectations. Over time, markets reassessed the persistence of the inflation shock following the Middle East conflict outbreak.

The December 2026 inflation fixings saw a sharp jump, while the June 2027 fixings rose steadily since mid-April as participants viewed the conflict as a persistent disruption source. Consequently, markets now anticipate inflation to persist beyond the initial energy price impact. Looking further ahead, the December 2027 inflation fixings only modestly increased, indicating a potential 2027 inflation decline, albeit above 2%.

This reassessment impacted expectations for the ECB's terminal rate, which surpassed 3% for the first time during this hiking cycle. Markets now expected a rate hike at the current meeting, with 84 basis points in total hikes anticipated by year-end, compared to 64 basis points at the July meeting. Survey of Monetary Analysts respondents took a more optimistic view, anticipating only a final rate hike at the September meeting.

In the United States, monetary policy expectations suggested a slightly higher terminal rate, with markets pricing in one to two rate hikes in 2026. Market discussions centered on the global rise in long-term yields, originating in the US due to high private and public issuance, fiscal trajectory concerns, and inflation uncertainty.

The euro area ten-year OIS rate and its components had gradually risen since late 2022, trading in a narrow range around four-year averages. However, since late 2024, all components had increased. The primary drivers were domestic factors like an improving macroeconomic environment and ECB monetary policy reassessment. US factors played a minor role, but US-to-euro area yield spillovers remained modest.

Euro area sovereign bond markets remained orderly, with bond spreads over OIS rates stable, indicating no broader sovereign credit risk reassessment. Euro area equity markets continued to rise, buoyed by macroeconomic positive data, strong corporate earnings growth, and sustained AI optimism. However, concerns grew over AI companies' increased leverage, much of which was off-balance sheet.

While direct EU exposures to AI-related leverage remained limited, investors were increasingly vigilant.