Euro-zone inflation rose to 3.3% in August, up from 2.9% in July, and one of the European Central Bank’s own policymakers is already saying the central bank’s next move will not be enough. Gediminas Simkus, a member of the ECB’s Governing Council, said the widely expected rate hike at the September 10 meeting will fall short of what is needed to bring inflation back to the 2% target.

The deposit facility rate is expected to increase by 25 basis points to 2.50%, after the ECB raised rates to 2.25% in June in its first increase in nearly three years. Simkus previously described that June decision as “too small to close the issue of inflation growth.” The timing matters because the ECB is still trying to balance a fresh inflation upswing against signs that underlying price pressure is less broad-based than the headline figure suggests.

Energy prices and the Iran factor

The main driver behind the inflation increase is energy prices, which have been rising steadily amid the ongoing conflict in Iran. Core inflation, which excludes volatile food and energy components, eased slightly to 2.4% in August, underscoring that the latest reading is being pushed more by external shocks than by a new acceleration in domestic demand. That distinction is likely to remain central to the ECB debate as policymakers weigh how much of the inflation move can be addressed with rates alone.

The ECB’s tightrope walk

The September rate hike is being treated as almost certain by economists and market participants. At the same time, most policymakers appear reluctant to signal additional tightening beyond September. The ECB’s staff projections, published in June, forecast headline inflation at 3.0% for 2026, easing to 2.3% in 2027 and reaching the 2.0% target in 2028.

Markets are not fully aligned with that gradual scenario. Traders are pricing in the possibility of further rate hikes over the coming year, reflecting a view that the Iran situation may not resolve quickly. For the ECB, the near-term challenge is that a move widely expected to be small may still be interpreted as only a partial response if energy-driven inflation remains elevated.

What this means for markets

Market participants will be watching for updated ECB staff projections at the September meeting. If the inflation forecasts are revised upward from June, it would indicate that even the ECB’s internal models are becoming less confident in a smooth disinflation path. That, more than Simkus’s public comments, could drive a repricing of rate expectations in European fixed income markets.