The European Central Bank raised its eurozone inflation forecasts on Thursday, now projecting headline inflation at 3% in 2026, 2.3% in 2027, and 2% in 2028, as the energy shock from the Iran war forces a sustained delay in the return to target.

Key Highlights

  • 2026 inflation raised to 3%: The ECB revised its 2026 eurozone headline inflation forecast up to 3.0%, from 2.6% in its March projections.
  • Target return pushed to 2028: The bank now expects inflation to reach 2.3% in 2027 and return to the 2% target only in 2028.
  • Growth forecast cut: Eurozone GDP growth is now projected at 0.8% for 2026 and 1.2% for 2027, revised down from prior estimates following a 0.2% Q1 2026 economic contraction.
  • Core inflation above target: Core inflation rose to 2.5% in May from 2.2% in April, indicating that price pressures have spread beyond energy.

The European Central Bank published updated quarterly projections on Thursday showing eurozone inflation running significantly above its 2% target through 2027, as rising energy costs linked to the ongoing Iran conflict and the disruption of Strait of Hormuz shipping continue to push prices higher across the bloc.

The ECB now expects headline inflation in the eurozone to average 3.0% in 2026, a substantial upgrade from its March forecast of 2.6%. Inflation is projected to ease to 2.3% in 2027 before reaching the bank's 2% target in 2028. The revisions reflect both the direct impact of elevated energy prices and growing evidence of second-round effects, with core inflation, which strips out food and energy, rising to 2.5% in May from 2.2% in April.

The updated projections accompanied the ECB's decision to raise its deposit facility rate by 25 basis points to 2.25%, the bank's first rate increase since September 2023. ECB President Christine Lagarde, describing the decision as "unanimous without reservations," said the Iran war was generating inflation pressures and that the rate move was "robust across a range of scenarios" mapping how the energy shock might evolve and affect the eurozone medium-term outlook.

The ECB simultaneously revised down its growth forecasts, projecting eurozone GDP expansion of 0.8% in 2026 and 1.2% in 2027, both lower than prior estimates. The downward revision reflects a more marked impact of the war on commodity markets, real incomes, and economic confidence. The eurozone economy contracted by 0.2% in the first quarter of 2026, raising warnings of a stagflationary period combining weak growth and persistent inflation.

The ECB stated it is not pre-committing to any specific rate path and will continue a data-dependent, meeting-by-meeting approach. The Governing Council noted risks to the inflation outlook remain to the upside, particularly if energy prices rise further or indirect effects from the conflict prove more persistent. The next ECB meeting is scheduled for July 23, 2026.