The European Central Bank is expected to raise its deposit rate for the first time in months when its governing council meets this week, as energy costs reignite price pressures across the currency bloc. Annual inflation in the eurozone climbed to 3.2% in May, up from 3% in April and well above the ECB’s 2% target, driven by a 10.9% leap in energy costs. The surge, linked to US-Iran tensions and broader supply disruptions, has revived uncomfortable memories of the 2023 inflation peak. Frankfurt policymakers are likely to lift the rate on deposits to 2.25% from 2%, a level held since last summer, in a bid to anchor expectations.

The rebound has exposed the fragility of Europe’s energy transition. While EU imports of liquefied natural gas have fallen by 1.2% since March—and by 20% in the UK—overall spending on fossil fuels remains high, and the bloc has grown more dependent on suppliers in the US and Russia. Meanwhile, a recent analysis shows that between 2023 and 2024, seven European countries had to discard 27 terawatt-hours of renewable electricity because of insufficient demand, at a cost of €7.5 billion. A severe blackout in Spain was blamed on grid instability from intermittent renewables, underscoring the gap between green ambitions and system reliability.

Across the Atlantic, investors are adapting by seeking protection in US Treasury Inflation-Protected Securities. The real yield on 30-year TIPS has climbed to 2.7%, near historic highs. With nominal 30-year Treasuries offering 5%, the inflation breakeven is around 2.3%—a level that many economists consider plausible given the latest consumer price data. A growing cohort of fund managers is betting that inflation will prove stickier than central banks anticipate, making TIPS an attractive hedge.

The tension is palpable even in emerging markets. In Brazil, a sell-off in local bond futures has pushed yields to their highest since April 2025, reviving speculation that the National Treasury may need to intervene by buying back government securities, as it did in March during a historic operation. Brazilian policymakers are watching the global rate cycle nervously, aware that a hawkish turn in Frankfurt or Washington could drain capital from riskier assets and amplify domestic instability.