Elevated euro-area inflation, driven by energy price surges from Middle East conflicts, underpins the 96% market-implied probability against an ECB rate cut in 2026. Staff projections show headline inflation averaging 3.0% this year and 2.5% in 2027—well above the 2% target—with core measures also revised higher, prompting the September deposit rate hike to 2.50% and market pricing for additional tightening into 2027. Resilient growth and upside risks to prices have shifted policy toward restriction rather than easing, consistent with trader consensus backed by real capital. Tail risks include faster de-escalation of geopolitical tensions that sharply lowers energy costs or an abrupt growth contraction that forces an earlier pivot.