Meeting of 10-11 June 2026

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Review of financial, economic and monetary developments and policy options Financial market developments Ms Schnabel started her presentation by noting that, since the Governing Council's previous monetary policy meeting on 29-30 April 2026, euro area financial markets had been torn between two competing developments: the unresolved conflict in the Middle East and the global artificial intelligence (AI) boom. The continued disruption to shipping in the Strait of Hormuz had reinforced expectations that oil prices would remain higher for longer, despite markedly lower near-term oil prices. Inflation fixings had declined from their high April readings but continued to hover above 3% for 2026 and above 2% for 2027. In tandem with oil prices, ECB rate expectations had moderated somewhat. However, markets still priced in around three interest rate hikes overall, while the median response in the ECB Survey of Monetary Analysts was an expectation of only two hikes. Although the war was weighing on growth expectations in the euro area and globally, investors’ risk appetite had remained strong. A key underlying factor had been renewed optimism about AI and strong momentum in AI-related investment. As a result, euro area equity markets had recovered close to pre-war levels, and corporate and sovereign bond spreads remained narrow. Overall, financial conditions had remained broadly unchanged since April 2026 but remained tighter than before the start of the Middle East war. Near-term oil prices had declined markedly from the peak reached at the time of the Governing Council's April monetary policy meeting. Brent crude oil prices had fallen from USD 118 to about USD 94 per barrel and had been hovering around that level since late May. At the same time, futures prices over longer horizons had remained largely insulated from the pronounced volatility observed in near-term contracts, with the latest futures curve even somewhat above the April curve and significantly above the levels recorded before the outbreak of the conflict. Gas prices had edged higher since the April meeting and continued to trade at around 50% above their pre-war levels. The impact of the Middle East conflict had extended beyond crude oil and gas prices. Since the start of the war, the prices of refined products such as petrol, diesel and jet fuel had increased by around 40-45%, significantly more than the price of oil. Prices of fertiliser-related products and plastics had also increased sharply, suggesting that higher energy costs were feeding into broader inflation by affecting downstream product prices. Food prices were expected to remain slightly higher relative to pre-war expectations and were also subject to some upside risks due to the “El Niño” event. The shifts in the oil futures curve had been mirrored in market-based inflation expectations. Inflation compensation (excluding tobacco) for 2026 and early 2027 had declined from the peaks at around the time of the Governing Council's previous monetary policy meeting. For later horizons, inflation fixings remained close to their April 2026 levels. This suggested that investors continued to expect the inflationary effects of the energy price shock to persist beyond the initial phase of the conflict, likely reflecting the expected pass-through from energy costs to other components of the pricing chain. Medium-term inflation compensation (excluding tobacco) – the one-year inflation-linked swap rate two years ahead – had increased by around 30 basis points following the outbreak of the war, driven partly by inflation risk premia, and stood somewhat above 2%. Longer-term inflation expectations remained broadly anchored, with only a small upward shift in five-year inflation compensation five years ahead. Risks to the inflation outlook over the medium term had shifted markedly to the upside since the outbreak of the war in the Middle East. According to risk-neutral options prices, markets assigned a 45% probability to inflation being above 2.5%, on average, over the next two years. By comparison, the probability of inflation being below 1.5% was assessed to be less than 15%. Interest rate markets were also pointing to upside risks, but uncertainty surrounding the policy path had moderated somewhat over the weeks preceding the current meeting and remained less pronounced than during the 2022-23 inflation spike. Hence, despite high uncertainty surrounding the macroeconomic outlook, the ECB’s reaction function appeared to be well understood, thus containing rate volatility. Against this backdrop, markets continued to expect a monetary policy response from the ECB to the persistent shock, with the precise number of expected rate hikes varying with oil prices. Markets were now firmly pricing in a first 25 basis point rate hike in June and a second one in September, with an 84% probability of a third 25 basis point rate hike by the end of 2026. The median expectation in the Survey of Monetary Analysts was for only two rate hikes in 2026, similar to expectations in Bloomberg and Reuters surveys. By contrast, in the United States monetary policy expectations had moved in the opposite direction over the previous weeks. After pricing out two interest rate cuts since the start of the war, market participants had recently started to fully price in one rate hike for 2026. Euro area nominal overnight index swap rates had declined mildly since the Governing Council's previous meeting on the back of somewhat lower rate expectations and inflation compensation, but they remained higher across maturities than before the war. The persistent shock, elevated macroeconomic uncertainty and higher risk-free rates had left their footprint on growth expectations. Market analysts nevertheless still expected growth to be well into positive territory, suggesting that forecasters assigned a low probability to a recession. Despite dampened growth expectations, risk sentiment had generally remained strong. While investors’ risk appetite had declined markedly in the euro area following the escalation of the conflict, the deterioration had been moderate by historical standards. Risk sentiment had lately recovered and was approaching levels seen before the start of the war. A key factor supporting risk sentiment had been renewed optimism about AI and its implications for corporate earnings. Earnings per share expectations for both the S&P 500 and the STOXX Europe 600 had been revised steadily higher since the start of 2026. They had continued to increase after the outbreak of the war in the Middle East, with revisions being particularly pronounced for the United States. Overall, investors appeared to view the earnings boost associated with the AI investment cycle as more than offsetting the negative impact of the energy price shock. Having recovered from their trough in March 2026, euro area equities currently stood well above their levels at the beginning of 2026 and close to those before the start of the war. A decomposition of the drivers of euro area equity markets confirmed that higher expected short-term and, especially, longer-term earnings had supported stock market developments, offsetting the negative impact of higher risk-free rates and higher risk premia. Corporate credit markets had also benefited from strong risk appetite and the broader optimism around AI, as the investment boom was seen as supportive for corporate earnings and credit quality. Corporate bond supply linked to the AI investment cycle had increased sharply over the past two years, especially in the United States. Euro area sovereign bond spreads over overnight index swap rates had also declined since the Governing Council's April monetary policy meeting. Like corporate bond spreads, sovereign bond spreads had shown no sign of a sustained widening since the start of the conflict. Compressed risk premia and elevated valuations across market segments despite significant macroeconomic shocks and rising inflation risks remained a key concern. High equity valuations, especially in Japan and the United States, increased the risk of an abrupt repricing, particularly if benign growth expectations or earnings prospects related to AI optimism were to be revised or if persistent inflation required material interest rate increases. The euro had weakened since the start of the Middle East war, reflecting the adverse terms-of-trade shock. However, the depreciation had been moderate overall, with the nominal effective exchange rate remaining close to pre-war levels. Against the US dollar, the euro had continued to move lower but remained in the narrow trading range around EUR/USD 1.16 observed over the past year. Ms Schnabel concluded by noting that euro area financial conditions had been broadly unchanged since the Governing Council's previous meeting, as reflected in the ECB's Macro-Finance Financial Conditions Index, but they remained tighter than before the war. Taking a longer perspective, financial conditions had remained broadly constant since the ECB’s last interest rate cut in June 2025, despite the repricing of monetary policy expectations after the start of the war, with the key easing factor having been stronger risk assets. The global environment and economic and monetary developments in the euro area Mr Lane then went through the latest economic, monetary and financial developments in the global economy and the euro area. Uncertainty surrounding the war in the Middle East remained very elevated, 15 weeks into the conflict. Ongoing negotiations might pave the way for an eventual resolution, but the potential for setbacks and re-escalation was high. The full implications of the war for medium-term inflation and growth would depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects. Starting with inflation developments, headline inflation – as measured by the Harmonised Index of Consumer Prices (HICP) – had increased to 3.2% in May, from 3.0% in April. Although energy prices had declined in month-on-month terms, base effects meant that annual energy inflation had edged up by 0.1 percentage points to 10.9%. Non-energy inflation had increased by 0.2 percentage points to 2.4% and food inflation had decreased to 2.0% from 2.4%, while core inflation – excluding the volatile components of energy and food – had increased to 2.5% from 2.2%. Goods inflation had inched up by 0.1 percentage points to 0.9% and services inflation had risen by 0.5 percentage points to 3.5%. Domestic cost pressures had eased in the first quarter, supported by slower growth in wages and profits. The annual growth rate of the GDP deflator had declined to 2.3% in the first quarter of 2026, from 2.6% in the fourth quarter of 2025. Profit margins had continued to shrink, indicating that profits continued to buffer the pass-through of higher labour costs. The energy shock was not feeding into wages yet. Annual growth of negotiated wages had declined to 2.5% in the first quarter of 2026, from 2.9% in the fourth quarter of 2025. This outcome was broadly in line with the ECB wage tracker, which, along with corporate surveys on wage expectations, continued to indicate that wage growth should ease over the year. Compensation per employee was projected to grow steadily at 3.2% in 2026, 2027 and 2028, implying an increase in real wages in each year. A range of forward-looking signals, including Purchasing Managers’ Index (PMI) input prices, pipeline pressures for food, selling-price expectations and some disruptions in supply chains, pointed to inflationary pressures in the coming months. Moreover, some indicators of underlying inflation had already been driven higher by the energy shock. Two exclusion-based measures of inflation available for May had each edged up by 0.2 percentage points – the HICP excluding energy and unprocessed food stood at 2.3% and the HICP excluding energy at 2.4%. Changes in the model-based measures of inflation available for April ranged from 2.2% to 2.6%, with the Persistent and Common Component of Inflation (PCCI) measure for headline inflation having increased by 0.2 percentage points since March. The signal from such measures of underlying inflation was consistent with the above-target rate of headline inflation for 2027 incorporated in the baseline projections that were published as part of the June 2026 Eurosystem staff macroeconomic projections for the euro area. The increase in energy prices would lift inflation further over the summer and keep it well above the ECB’s 2% target into the first half of 2027. The June staff projections saw headline inflation rising from 3.2% in the current quarter to 3.4% in the third and fourth quarters of 2026, before it eased to 3.2% and then to 2.3% in the first and second quarters of 2027 and stabilised at target from the third quarter onwards. On average, headline inflation was projected at 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028. The trajectory of headline inflation was dominated by the projected energy inflation profile. The downward slope of the energy futures curves, compounded by a negative base effect in the energy component, would push inflation down in 2027, while the introduction of the EU Emissions Trading System 2 would push energy inflation up in 2028. Relative to the March 2026 ECB staff projections, headline inflation had been revised up by 0.4 percentage points for 2026 and 0.3 percentage points for 2027. This was largely on account of higher energy and food price assumptions, as well as higher goods and services inflation due to stronger indirect effects from the energy shock. Headline inflation had been revised down by 0.1 percentage points for 2028, reflecting a steeper than previously assumed decline in oil prices. Non-energy inflation was projected to average 2.5% in 2026, 2.7% in 2027 and 2.2% in 2028. Core inflation was projected at 2.5% for both 2026 and 2027, and at 2.2% for 2028, having been revised up by 0.2 percentage points, 0.3 percentage points and 0.1 percentage points respectively. Inflation expectations over shorter horizons remained well above the levels observed before the outbreak of the war in the Middle East. At the same time, most measures of longer-term inflation expectations stood at around 2%, supporting the stabilisation of inflation around the ECB’s target in the medium term. According to market-based inflation compensation measures, inflation was expected to average 3.0% in 2026, 2.4% in 2027 and 2.0% in 2028. The latest Survey of Monetary Analysts also pointed to above-target inflation in the near term but a return to target in the third quarter of 2027. Households continued to expect above-target inflation also at longer-term horizons, which might reflect an upward bias in household inflation expectations that was visible in consumer surveys globally. However, the fact that longer-term expectations – as reported in the ECB Consumer Expectations Survey – had remained relatively stable relative to pre-war levels and that the term structure of household inflation expectations was steeply downward-sloping confirmed that the current inflation shock was expected to fade relatively quickly. Turning to the external environment, the global economy had remained resilient overall. Incoming information pointed to global economic growth (excluding the euro area) of 0.7% quarter on quarter in the first quarter of 2026, following growth of 0.8% in the fourth quarter of 2025, and survey indicators suggested continued expansion in the second quarter. The global composite PMI (excluding the euro area) was little changed in May, at 52.3. Services activity had been more subdued than manufacturing, since manufacturing appeared to be supported by a temporary boost as firms built buffers in anticipation of supply chain disruptions. Global PMI supplier delivery times were stable in May, after lengthening in April, and supply pressures had so far remained concentrated in energy and energy-intensive goods. Since the Governing Council’s April meeting, Brent crude oil prices had declined by roughly 20% to around USD 94 per barrel, although this was still about 30% higher than pre-war levels. European gas prices stood about 50% above their pre-war level, at around EUR 50 per MWh. The latest oil futures of 8 June stood somewhat below the baseline assumptions of the June staff projections for the duration of 2026 and reconnected to the baseline assumptions from 2027 onwards. The euro had depreciated slightly – by 1.4% to USD 1.15 and by 0.8% in nominal effective terms – amid continued uncertainty over a potential peace agreement to bring an end to the conflict in the Middle East. This recent mild depreciation only partly reversed the sizeable appreciation that had taken place during the first half of 2025. The euro area economy had contracted unexpectedly by 0.2% in the first quarter of the year, owing to a contraction in measured multinational activity in Ireland. Excluding Ireland, the euro area economy had grown by 0.3%, supported by domestic demand and exports. Public and private consumption had contributed positively, while investment and inventories had declined. Nevertheless, the war in the Middle East was weighing on activity. The euro area composite PMI had fallen again in May, by 0.3 points to 48.5. The weakening in services activity, which was more pronounced than in manufacturing, mirrored the global PMI dynamics since the start of the war. However, the support from precautionary inventory accumulation by firms already seemed to be fading, as new orders had stagnated in May. Supplier delivery times had lengthened further but remained far shorter than during the pandemic period. The labour market remained resilient. The unemployment rate continued to stand close to historical lows, at 6.3% in April, with recent surveys pointing to some labour hoarding. Labour demand had cooled further, and firms and households expected the labour market to weaken. Employment growth had slowed in the first quarter of the year, to 0.1% from 0.2%. The job vacancy rate had edged down by 0.1 percentage points to 2.2% in the first quarter of 2026, and high-frequency indicators – such as Indeed job postings – had weakened. The composite employment PMI had edged down again in May, to 49.0, reflecting developments in both manufacturing and services. The euro area fiscal stance was projected to loosen by 0.5 percentage points in 2026 and then to tighten somewhat again over 2027-28. The loosening in 2026 was mainly on account of investment and fiscal transfers, with the increase in investment primarily reflecting high defence and infrastructure spending in Germany. The subsequent tightening was seen as the result of a mix of factors, including the unwinding of temporary fiscal support measures and the Next Generation EU funding programme coming to an end. Looking ahead, domestic demand was now projected to be weaker than had been expected in the March projections, as the war was weighing on confidence and higher energy costs were eroding real incomes. At the same time, household balance sheets were solid overall, and consumption should remain the main driver of growth. Higher energy costs and lower confidence would dent private investment in the short run, but it should be underpinned by firms investing in new digital technologies. Higher government spending on defence and infrastructure should continue to support public investment. These factors were expected to provide some cushioning against the fallout from the war. The June staff baseline projections foresaw real GDP growth of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. Relative to the March projections, growth had been revised down by 0.1 percentage points for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence. For 2028, growth had been revised up by 0.1 percentage points owing to an unwinding of these effects. The June baseline projections were flanked by three scenarios – one milder, one adverse and one severe – that reflected the large uncertainty surrounding the baseline. While the scenarios in the March staff projections were more explicitly linked to assumptions about the duration of the war, the scenario analyses in the June staff projections were instead calibrated using market‑implied probability distributions for commodity prices. Under the adverse and severe scenarios, inflation would remain above target over the entire projection horizon, while growth would be lower than in the baseline in the near term. Under the milder scenario, inflation would peak at a level similar to the baseline but would fall below target in the medium term, while growth would be slightly above the baseline for 2027 and 2028. Financial conditions were broadly unchanged since the Governing Council’s previous meeting but remained tighter than before the war. The cost of issuing market-based debt had risen to 4.0% in April, from 3.9% in March. The growth rate of corporate bond issuance had risen to 4.6%, from 4.1% in March. Regarding bank-based financing of firms, higher funding costs, higher risk perceptions and generally low risk tolerance might keep credit supply relatively tight, but solid balance sheets were helping banks withstand current economic and financial headwinds. Bank lending rates for firms had remained at 3.6% in April and mortgage rates at 3.4%. The annual growth rate of bank lending to firms had increased to 3.4% in April, from 3.2% in March. Mortgage lending again grew by 3.0% in April. Monetary policy considerations and policy options On the basis of incoming information and a comprehensive assessment of the inflation outlook and the risks surrounding it, as well as the dynamics of underlying inflation and the strength of monetary policy transmission, Mr Lane proposed that the three key ECB interest rates be increased by 25 basis points. The incoming information about the intensity and duration of the energy shock and the likely persistence of its impact on inflation suggested that a 25 basis point policy rate hike in June was appropriate. This would ensure that the Governing Council remained well positioned in the period ahead. The case for a measured adjustment in the policy rate was robust across a wide range of scenarios, given the projected paths for inflation and output. The absence of financial stress on the one hand, and solid household, corporate and bank balance sheets on the other, meant that a hike should be transmitted through the financial system in an orderly manner. Retaining the data-dependent, meeting-by-meeting approach without a pre-commitment to any particular rate path remained appropriate. 2. Governing Council’s discussion and monetary policy decisions Economic, monetary and financial analyses Regarding the economic analysis, members broadly agreed with the assessment provided by Mr Lane in his introduction. The external environment had remained resilient overall but continued to be shaped by the global energy shock and still elevated geopolitical uncertainty. While a possible resolution to the war in the Middle East had been intimated many times, the conflict was now into its fourth month, and incoming information had shown the energy shock to be more persistent and intense than previously expected, particularly in terms of its global effects. Still, global growth was holding up, with global PMIs in expansionary territory and solid growth in the United States and China. Global growth was being supported by the AI-related investment boom, which constituted a positive global demand shock that was cushioning the adverse growth effects of the energy shock while reinforcing its inflationary impact, particularly in the United States. Indeed, global and US inflation were increasing sharply as pipeline pressures propagated through global supply chains, especially for goods. US headline inflation had risen to 4.2% in May, with demand conditions appearing to be stronger than in the euro area, partly because of the AI boom but also on account of wealth effects. Commodity markets – for oil in particular – were a central theme in the discussion. In the baseline of the June staff projections, oil prices were expected to remain at a higher level than in the March adverse scenario, particularly over longer horizons, indicating that the shock had become more persistent. Oil and gas prices also remained well above pre-war levels and higher energy prices were having knock-on effects on downstream markets, such as refined products, plastics and fertilisers. At the same time, it was argued that the shock should be increasingly viewed as being more of an oil shock than a broad-based energy shock involving natural gas, fertilisers and other channels. This was partly because natural gas from the affected region represented a limited share of global gas consumption and because an acceleration in renewable energy could substitute for gas relatively quickly. Oil, on the other hand, was a different matter given the very large supply disruption, low short-run demand elasticities and the relatively limited and gradual impact on oil demand from the transition to electric vehicles. While oil prices continued to be volatile in light of fluctuating prospects for a resolution to the conflict, it was suggested that the current market pricing embedded in the futures curve might be too benign, with the expectation of a future fall in oil prices being optimistic. The earlier accumulation and subsequent release of oil inventories by China had been one factor explaining global energy price developments, and these dynamics – together with a wider global run-down of pre-existing inventories – could have helped to contain upward price pressures by attenuating physical supply disruptions. However, inventories were falling and, if they reached critical levels, oil prices could rise quickly, with additional uncertainty particularly in relation to refined fuels. In this context, there was a discussion of why oil prices had not risen more sharply despite the continued closure of the Strait of Hormuz. Although this could potentially be attributed to expectations about a peace deal, other possible explanations included increased oil production, the use of pipelines and other alternative routes, inventory usage, Chinese storage behaviour, and demand destruction, including from lower energy-intensive production activity in China. Looking ahead, it was cautioned that even a sustainable resolution to the conflict in the Middle East would not necessarily mean an end to the shock. This was because it would take time for energy supplies to return to normal or to a new equilibrium, and inventories would also need to be replenished at some point, which could put upward pressure on energy prices for a sustained period, especially if reserves fell to very low levels before the conflict was resolved. With regard to economic activity, members concurred with the assessment presented by Mr Lane. Adjusting for a temporary factor in Ireland, the euro area economy had grown in the first quarter of the year, supported by domestic demand and exports. When this adjustment was not taken into account, euro area GDP had unexpectedly contracted by 0.2% in the first quarter, owing to a sharp reduction in measured multinational activity in Ireland. It was important that the economic assessment and communication should distinguish statistical effects in Ireland from economic fundamentals, primarily by focusing on the modified domestic demand indicator for economic activity in Ireland developed by staff. Euro area domestic demand remained relatively robust and the economy had shown momentum around the turn of the year, which was providing support to growth in 2026 via carry-over effects. However, the incoming data were, overall, seen as confirming that the energy shock was having greater implications for growth than previously expected. In particular, the war in the Middle East was weighing on activity and confidence, and surveys were pointing to a slowdown, especially in services. Manufacturing had held up so far, partly reflecting higher defence spending. However, this could be partly attributed to firms building up stocks to cope with supply chain pressures. It was suggested that such front-loading of production and inventory accumulation by firms should not be seen as giving too much comfort, since they reflected concerns about supply chains, such as those in globally integrated sectors like the automotive sector and the machinery sector. More generally, higher input costs and longer delivery times were putting pressure on firms. At the same time, it was reported that, for the Spanish economy, high-frequency real-time indicators pointed to practically no short-run impact on activity. Overall, the war-related rise in energy prices was acting as an increasingly persistent negative supply shock, putting upward pressure on inflation and downward pressure on economic growth. Against this backdrop, the growth outlook had weakened, particularly when compared with the December 2025 staff projections, published prior to the start of the war, but also when compared with the March 2026 staff projections, and it remained fragile and surrounded by a high degree of uncertainty, with risks being to the downside. In the June 2026 projections baseline, staff now expected economic growth to average 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. This represented a downward revision for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence. In particular, staff now expected domestic demand to be weaker than they had projected in March as the war weighed on confidence and higher energy costs eroded real incomes. At the same time, household balance sheets were solid overall and consumption should remain the main driver of growth. Higher energy costs and lower confidence would dent private investment in the short run, but it should be underpinned by firms investing in new digital technologies. Governments spending more on defence and infrastructure should continue to support public investment. These factors were expected to provide some cushioning against the fallout from the war. Therefore, economic growth was expected to increase gradually over the projection horizon and recession risks remained relatively low. The current situation could thus not be characterised as stagflation. In this context, it was also noted that the economy had exhibited surprising resilience in the face of other adverse shocks over recent years. Nevertheless, the outlook for growth – especially for 2026 – was assessed as sluggish. However, it continued to be supported by still rising nominal incomes, accumulated savings, the resilient labour market, AI-related investment and government spending on defence and infrastructure. It was also argued that the euro area economy had become more adaptable to energy shocks, reflecting its reduced dependence on fossil fuels. These factors could help explain why the revision to the growth outlook in the latest projections had been relatively small compared with the revision to the inflation outlook. However, it was cautioned that the aggregate GDP outlook could be masking weaker domestic demand components, with consumption and investment revised down and only lower imports helping to cushion the effect on headline growth, with the scale of the revision for imports seen as relatively large when compared with the revision for domestic demand. The outlook for exports was constrained by a structural loss of market share to competition from China and by the euro area economy being less geared towards technology and AI than some other parts of the world. Risks to economic growth were to the downside, especially in services, with the risk of shortages and severe supply chain disruptions increasing the longer conflict-related disruptions went on. At the same time, it was suggested that the euro area economy would probably return to being more services-led if there were a resolution to the conflict. It was also argued that part of the weakness in euro area growth was structural and that this became more visible in challenging times. Over the medium term there was also a risk that the euro area’s structural growth challenges could be compounded if there were a more substantial fragmentation of the world economy. Private consumption was one key channel through which higher energy prices would weigh on activity by eroding real disposable income and reducing consumer confidence. Although the effect on consumption could be partly buffered by using accumulated savings, it was noted that financially constrained households could not fully smooth consumption. Nevertheless, it was stressed that consumption should be supported by continued relatively strong nominal wage growth, rising real wage growth – especially later in the projection horizon – and low unemployment. There were also signs that consumers were adapting to higher fuel prices to some extent, as reflected in declining petrol consumption and strong sales of electric vehicles. At the same time, it was suggested that there were downside risks to the outlook for consumption. The rapid deterioration in consumer sentiment could weigh on spending. In addition, the assumption that there would be a swift recovery in consumption if the shock were temporary, was challenged. In particular, it was argued that households might instead perceive the repeated sequence of negative shocks over recent years as a more permanent deterioration in their income prospects, potentially linked to concerns about geopolitical developments and international fragmentation. It was also questioned whether the projections for private consumption were consistent with the shock being temporary. If the shock were perceived to be temporary, theory would suggest that households should buffer it by using their savings rather than by substantially reducing their consumption. Given that, in the projections, consumption was expected to decline, this could be interpreted as evidence either that some households lacked sufficient buffers of savings, or that households did not regard the shock as temporary. In addition, it was suggested that households – especially those at the lower end of the income spectrum who might quickly deplete their buffers of savings – could use any future increases in labour income to repair their balance sheets rather than spending more. While private investment was expected to be hampered in the near term by higher energy costs, elevated uncertainty and reduced confidence, it was also being supported by AI-related investment. However, it was argued that there could be some downside risks to investment. In particular, the ongoing sequence of adverse supply shocks and persistent uncertainty might make firms think twice before investing, the closure of the Strait of Hormuz could constrain AI investment if the availability of helium became further impaired, and tightening credit conditions could weigh on investment more generally. The labour market remained resilient and continued to support domestic demand, with additional jobs being created in the first quarter, although at a slower pace than in the last quarter of 2025. While labour demand had cooled further and firms and households expected the labour market to weaken, it was pointed out that there was still more confidence in employment prospects than had been the case before the pandemic. Unemployment also remained close to historical lows, with the June staff projections seeing a further decline in the unemployment rate – from 6.3% to 5.9%. It was argued that this could indicate a further tightening of the labour market. However, there was also a risk that employment would not remain as resilient following this shock as had been the case following the 2022 shock, because firms might be less inclined to hoard labour this time and might instead use the opportunity to substitute AI for labour. Turning to fiscal policy, it was noted that, while much smaller than during the 2022 energy shock, recently introduced energy-related fiscal support measures were helping to cushion the effect of the current shock on the economy, although the effect of these measures might be dampened by increased VAT revenues from higher energy prices. More generally, part of the expected resilience of the euro area economy could be attributed to public investment linked to greater spending on defence and infrastructure, especially in view of the German fiscal package announced in March 2025, and to the Next Generation EU programme, which was a major source of funding that was not dependent on the economic cycle. The recent European Commission proposal to grant limited additional fiscal leeway under the national escape clause for defence expenditure in relation to projects supporting energy resilience and transition could also pose an upside risk to growth if it led to additional fiscal spending. At the same time, it was warned that fiscal policy was already relatively loose. Since fiscal sustainability was a crucial anchor for broader economic stability, it was vital to maintain sound public finances. In this context, fiscal responses to the energy price shock should be temporary, targeted and tailored, as emphasised in the European Commission’s 2026 European Semester Spring Package. Regarding structural policies, there was an urgent need to strengthen the euro area economy. Reforms to enhance the euro area’s growth potential and accelerate the energy transition to reduce reliance on fossil fuels were more vital than ever. Completing the savings and investments union was key to funding innovation, supporting the green and digital transitions, and improving productivity. The digital euro and tokenised wholesale central bank money would enhance Europe’s strategic autonomy, competitiveness and financial integration, and would boost innovation in payments. It was thus essential to swiftly adopt the Regulation on the establishment of the digital euro. Simplifying and harmonising rules across the EU’s Single Market would help European firms grow faster. Against this background, members assessed that the risks to the growth outlook were to the downside, mainly owing to the war in the Middle East, which had added to the volatile global

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