ECB Hikes Rates, First G7 Central Bank to Act on Energy Shock

The European Central Bank raised interest rates by 25 basis points, becoming the first G7 central bank to tighten policy in response to inflationary pressures driven by the Middle East energy shock. ECB President Christine Lagarde stated that the decision was necessary as inflation was spreading beyond energy and affecting other goods and services. Bundesbank President Joachim Nagel indicated that the Governing Council will keep all options open for its July monetary policy meeting and is ready to act again if needed to prevent the energy price surge from spreading. Sources close to the discussions suggested a July rate hike was not the base case but could occur if energy prices rise further or inflation surprises materialize. Nagel emphasized the Governing Council's determination to prevent inflation expectations from becoming unanchored. ECB Governing Council member Primoz Dolenc stated the hike was necessary to keep prices in check while officials consider the broader implications of conflict in the Middle East, enabling the ECB to "do the thinking of the broader environment in the next meetings."