The European Central Bank raised its policy rate by a quarter point to 2.50% on Thursday, seeking to quell an energy-driven rise in inflation triggered by the Iran war. The bank also lifted its 2027 inflation forecast to 2.5% and core inflation to 2.6%.
The ECB's rate hike aims to curb inflation driven by geopolitical energy shocks, impacting borrowing costs and economic growth across the Eurozone.
The European Central Bank raised its benchmark interest rate by a quarter percentage point to 2.50% on Thursday, aiming to cool inflation that is being fed by high oil prices from the Iran war. The bank said in a statement that the conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period. The decision was supported by a stronger-than-expected economy that suggests businesses can weather the higher borrowing costs. The ECB also lifted its 2026 economic growth projection to 0.9% from 0.8% and now expects inflation to average 3.0% this year and 2.5% in 2027. The rate hike brings the ECB's benchmark deposit rate to 2.5%, considered the neutral level that neither stimulates nor restricts economic activity. While financial markets anticipate further rate increases, the ECB is likely to proceed cautiously given the uncertain economic outlook. Persistent high energy costs suggest continued inflation, and the ongoing conflict in Iran offers no quick resolution. Natural gas prices are a particular concern, with storage levels below normal ahead of winter. Economic growth has shown resilience, potentially adding to price pressures. However, second-round effects, where higher energy costs spread to other goods and services, have not yet materialized. Underlying inflation, excluding volatile food and fuel, even slowed due to moderating services inflation, and wage growth is also decelerating. Bond yields have risen sharply, partly mirroring increases in U.S. Treasuries, which is already tightening financing conditions.