Energy tensions drive inflation, ECB raises rates

Renewed Middle East hostilities have fueled energy price increases, prompting the European Central Bank to raise its key interest rates by 25 basis points at its June meeting. Global growth continues to face significant risk factors, with inflation pressures rising across major economies.

Global ripples from Mideast tensions

Renewed hostilities between the United States and Iran have reignited energy market tensions, pushing oil and natural gas prices higher in July, remaining above pre-conflict levels.

Global economic activity continues, with US growth supported by AI investments and private consumption, and China by exports.

World trade, strong in Q1 due to AI-related goods, is projected to slow in H2 amid Middle East supply chain disruptions, clouding the global outlook.

Rising energy prices are driving inflation across major economies.

The Bank of Japan raised policy rates, while the Federal Reserve and Bank of England maintained theirs.

In the euro area, GDP grew moderately by 0.3 percent in Q1, but spring growth was modest due to the conflict.

June Eurosystem projections revised euro-area GDP growth downwards to 0.8 percent in 2026, and consumer price inflation upwards to 3.0 percent for the same year.

The European Central Bank responded by increasing its key interest rates by 25 basis points at its June meeting to address these inflationary pressures.

Italy's economy navigates headwinds

Italy's economy grew moderately by 0.3 percent in the first quarter, supported by exports, investment, and consumption, but showed signs of slowing in the spring amid the Middle East conflict.

June projections forecast Italian GDP growth at 0.5 percent in 2026, reflecting elevated energy prices and geopolitical uncertainty.

Goods exports held stable despite Middle East sales declines, yet the energy deficit is expected to widen.

The labor market remains robust, with employment gains and a record-low unemployment rate, while wage growth is moderate.

Inflation reached 3 percent in Q2, driven by energy prices, though government measures mitigated the impact on consumer bills.

Short-term inflation expectations have risen.

Lending to firms accelerated, and interest rates on new loans increased slightly.

Public finance estimates indicate a declining deficit trend for 2026-29, with the debt-to-GDP ratio set to fall after 2026, receiving a positive assessment from the European Commission.

Geopolitical tremors, policy responses

This bulletin starkly illustrates how geopolitical instability is now a primary driver of economic and monetary policy.

Central banks are forced to react to supply-side shocks, but the persistent uncertainty from the Middle East conflict complicates any clear forward guidance.

The report highlights the delicate balance between containing inflation and safeguarding fragile growth, demanding agile and data-dependent policy responses.