The European Central Bank announced on Thursday an increase of 25 basis points across its three key interest rates, marking its first rate hike since September 2023, a move aimed at tackling a resurgence in inflation fueled by conflict in the Middle East.
Following the adjustment, the ECB's deposit facility rate rises to 2.25%, the main refinancing rate to 2.40%, and the marginal lending rate to 2.65%. This decision received unanimous support from the Governing Council and was widely anticipated by the market.
In its statement, the ECB explicitly noted that "the war in the Middle East is generating inflationary pressures," asserting that the rate hike decision is robust across various modeled scenarios. ECB President Christine Lagarde stated at a press conference that this increase is a necessary response to the broadening of inflation, not a so-called "pre-emptive hike."
The immediate catalyst for the ECB's action was a rapid rebound in inflation data. International energy prices have surged significantly due to disruptions in shipping through the Strait of Hormuz caused by the Iran conflict. The eurozone's inflation rate for May climbed to 3.2%, well above the ECB's 2% target. Within this, energy prices rose 10.9% year-on-year, and service prices increased to 3.5%, indicating that price pressures are spreading into the broader economy.
In its latest economic projections, the ECB substantially raised its inflation forecasts, now expecting an average inflation rate of 3.0% for 2026 and 2.3% for 2027. Concurrently, as the energy shock exacerbates supply chain pressures and uncertainty, the central bank downgraded its eurozone growth forecast to 0.8% for 2026 and 1.2% for 2027.
Lagarde emphasized that future policy moves will follow a "data-dependent" approach, with decisions made meeting-by-meeting, and no pre-commitment to a specific interest rate path. Analysts suggest that if energy prices remain persistently high, the ECB could implement further rate hikes within the year.
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