The Governing Council of the European Central Bank has raised its key interest rates for the first time since September 2023. The deposit rate was lifted by 25 basis points, from 2% to 2.25%; the rate on the main refinancing operations was increased to 2.4%, and the marginal lending rate to 2.65%. The decision is a direct response to the inflationary shock triggered by the war in the Middle East.
The ECB thus becomes the first major central bank to tighten monetary policy in response to the energy shock unleashed by the conflict. By comparison, the U.S. Federal Reserve and the Bank of England have so far adopted a wait-and-see stance and are assessing the fallout; both institutions hold their meetings next week.
Inflation Spreads Beyond the Energy Sector
Commenting on the decision, ECB President Christine Lagarde warned that the inflation triggered by the war is no longer confined to the energy sector and is beginning to spread across the wider economy. In May, annual inflation in the euro area accelerated to 3.2%, well above the 2% target. At the same time, core inflation (excluding energy and food) rose to 2.5%.
Christine Lagarde stressed in particular that the rate hike is not pre-emptive: the ECB is responding to inflationary effects that are already observable, rather than to hypothetical future risks. In her words, the most dangerous scenario would be inaction, if inflation were allowed to accelerate and spiral out of control, bringing it back to target would prove far more difficult.
In its statement, the Governing Council says the war in the Middle East is generating inflationary pressures, and that the decision to raise rates remains “robust” across a range of scenarios for how the shock might evolve and affect the euro area’s medium-term outlook.
The Forecasts
Alongside the rate increase, the ECB revised its projections. The bank raised its 2026 inflation estimate to 3% (up from 2.6% in its March forecast), expecting it to ease to 2.3% in 2027 and return to the 2% target by 2028. The main factor cited is persistently high energy prices, which are feeding through into the cost of food, goods and services.
Growth projections, by contrast, were lowered. The ECB now expects euro-area growth of just 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. The downward revision was attributed to “a more pronounced impact of the war on commodity markets, real incomes and confidence” among businesses and consumers.
