The European Central Bank has raised its benchmark interest rate by 25 basis points to 2.25%, the first hike since 2023, to tame inflation fueled by the Iran war. The move comes despite risks to the struggling eurozone economy, with inflation at 3.2% and growth forecast cut to 0.8%.
The European Central Bank (ECB) on Thursday raised its benchmark interest rate for the first time since 2023, lifting the deposit rate by 25 basis points to 2.25%. The decision, aimed at curbing inflation driven by the Middle East conflict, makes the ECB the first major central bank to tighten monetary policy in response to the energy shock from the war.
Eurozone inflation accelerated to 3.2% in May, above the ECB's 2% target, as the US-Israeli war against Iran disrupted energy supplies. The ECB stated that the war is generating inflation pressures and that the outlook remains uncertain, with upside risks for inflation and downside risks for economic growth. The central bank also raised its 2026 inflation forecast to 3% from 2.6% and cut its growth projection to 0.8% from 0.9%.
Key Points
- ECB raises deposit rate by 25 bps to 2.25%, first hike since September 2023.
- Inflation in the eurozone hit 3.2% in May due to Middle East war.
- ECB cuts 2026 growth forecast to 0.8% from 0.9%.
- Strait of Hormuz remains nearly closed, impacting oil and gas transit.
- US Federal Reserve and Bank of England hold rates steady for now.
The rate increase is the first since September 2023, when the ECB was battling post-Ukraine war inflation. After a series of cuts, rates had been held steady since June 2025. Higher borrowing costs are intended to dampen demand and reduce inflation, but critics warn that the current inflation stems from supply shortages rather than strong demand, making rate hikes less effective.
The move could further weigh on the eurozone economy, which contracted in the first quarter of 2026, dragged down by a slump in Ireland. Hefty energy costs are already burdening households and businesses. Analysts note that ECB officials may be acting preemptively to avoid criticism of moving too slowly, as in 2022. However, most do not expect this to be the start of an aggressive hiking cycle, with ECB President Christine Lagarde expected to remain cautious in her press conference.