Money markets are pricing a more hawkish European Central Bank as geopolitical tensions, elevated energy costs and tight fuel and gas supplies threaten to prolong inflation. The ECB is expected to raise its deposit rate to 2.5% in September after tightening in June following an energy shock caused by the U.S.-Iran war. Markets now see about a 25% chance of rates reaching 3% by March 2027 and roughly 60% by September, compared with no such chance a month earlier. Oil remains above $90 a barrel, while refined-fuel supply risks, low euro zone gas inventories and the possibility that the conflict lasts beyond the U.S. midterm elections in November are keeping investors wary. Analysts say rate-hike expectations remained firm even after oil fell from $120 in April and physical Brent premiums dropped from $40 to $7. The five-year euro short-term rate overnight index swap, a gauge of the euro zone's neutral rate, reached about 2.85%, its highest since November 2023. Fiscal expansion, green-transition investment, defence spending and tight labor markets could also weaken disinflationary forces, while euro zone business activity reached its fastest growth pace of the year.