ECB raises key rate by 0.25 percentage point amid Middle East energy shock

The European Central Bank increased its key interest rate by a quarter point on Thursday, bringing it to 2.25%, as it seeks to counter inflationary pressures linked to the ongoing Iran-U.S. conflict. The Governing Council said the move was justified across a range of scenarios that consider the war’s impact on medium-term inflation and growth.

In its statement, the ECB said the conflict in the Middle East is generating inflation pressures and that the decision to raise rates is robust under various shock-evolution scenarios. It also lifted its headline inflation forecast, now expecting an average of 3% in 2026, easing to 2.3% in 2027 and 2% in 2028, citing higher energy prices that could affect food, goods and services.

Growth projections were lowered, with the bank now forecasting euro-area growth of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. Officials said the revision reflects a stronger impact of the war on commodity markets, real incomes and confidence.

ECB President Christine Lagarde told reporters that the outlook remains uncertain, with upside risks to inflation and downside risks to growth, and that the bank is not pre-committing to a specific rate path. She added that the full medium-term effects will depend on the intensity and duration of the energy price shock.

Euro-zone inflation stood at 3.2% in May, driven by higher energy costs, while the region’s economy grew by 0.1% in the first quarter. Market participants noted the hike as the first by a major central bank in response to the current energy shock, and some analysts expect at most one more increase before the cycle ends.

The 10-year German bund yield slipped slightly, and the euro remained unchanged against the dollar and the British pound.