Last year the ECB was cutting rates. This week the head of Germany's Bundesbank said the bank needs to be ready to hike.
The reason is oil, and the war that is pushing it higher.
Euro-area inflation hit 3% in April, up from 2.6% in March, and the jump came almost entirely from one place: energy prices, which rose 10.9% year over year.
The Strait of Hormuz has slowed oil and gas shipments since the Iran war disrupted the route. Europe imports less Gulf oil than Japan does, but its energy market still feels every supply shock through global prices.
Joachim Nagel, the Bundesbank president and an ECB Governing Council member, said the bank "must act" if the war keeps lifting prices. That language is a step up from his "highly vigilant" line a week earlier.
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A rate hike from the ECB would be a real reversal. The bank spent the last year cutting to support a soft European economy, and now it is openly weighing the opposite move.
Other officials are lining up behind Nagel. ECB Executive Board member Isabel Schnabel warned last week about "second-round effects," which is when energy shocks spread from gas pumps into wages and broader prices.
Why it matters: once second-round effects take hold, central banks usually have to act faster and harder to pull inflation back, since wage growth is much harder to reverse than a single oil spike.
European bank stocks tend to do better when rates go up, since they earn more on loans. Bond prices tend to do worse, because bond yields rise to match the new rate environment.
The ECB's next rate decision lands in June, and traders are starting to shift their bets toward a hike from a hold.
If euro-area inflation prints another hot number before that meeting, the case for a hike gets harder to argue against. Watch the May flash inflation print at the end of the month for the next big signal.
A surprise hike would lift the euro against the dollar, which would pressure US multinationals that earn revenue in Europe. Watch big consumer names with heavy European exposure, like Apple and Procter & Gamble.
The ECB went into 2026 expecting more cuts. It is heading into summer expecting hikes.
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