European Central Bank Raises Interest Rates Amid Inflation Concerns

The European Central Bank has raised interest rates for the first time since 2023 in response to higher inflation caused by the war in Iran.

The ECB raised its main deposit rate from 2% to 2.25% in a move that financial markets expect to be the first of three rises by next spring.

Eurozone consumer price inflation rose to 3.2% in May 2026, from 3% in April, sparking concerns that the conflict in the Middle East will force manufacturers and retailers to push through price increases into the summer and autumn to maintain profit levels. The ECB’s inflation target is 2%.

The ECB’s president, Christine Lagarde, said the outlook for inflation and the broader economy was uncertain while the war in Iran continued to push energy costs higher.

“The full implication of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects,” she said.

The increase in rates will be widely seen as as attempt by the ECB to get a grip on inflation at an early stage following criticism that it delayed rate rises in 2022 after Russia’s invasion of Ukraine.

The interest rate on its main refinancing operations, which commercial banks use to borrow funds from it, was also raised to 2.4%, from 2.15%.

ECB officials nudged down their forecast for growth in the eurozone, to 0.8% in 2026 and 1.2% in 2027. That compared with previous forecasts of 0.9% and 1.3%.

Lagarde said: “The risks to the growth outlook are to the downside, mainly owing to the war in the Middle East, which has added to the volatile global policy environment.

“Prolonged disruption of energy supplies could increase energy prices further and for longer than currently expected.”

The central bank had held interest rates level until now in the hope that the US and Iran would sign a peace deal, limiting the need for a rise to counter inflationary pressures.

So far, however, a deal has proved out of reach and oil prices remain above $90 a barrel, compared with about $70 before the war started.

Lagarde said that in March the central bank’s governing council had considered “looking through” the rise in energy prices sparked by the Middle East conflict, but that it was clear higher oil and gas prices were already pushing up inflation.

Mark Wall, chief European economist at Deutsche Bank, said: “This is a significant moment. Not only is this the first ECB hike since 2023, it is also the first hike by one of the major global central banks in response to the energy shock.

“The ECB is saying that a ‘look through’ strategy is not a robust response.”

He said, however, that financial markets were wrong to expect two more rate rises by next March when it was clear that the economy was weakening with unemployment rising and growth slowing.

“The question is how far can this tightening cycle go. Not far is our answer. There is upside risk to inflation, but there is also downside risk to growth,” he said. “One more hike in September and that’s it.”

Bank of England policymakers are expected to leave UK interest rates on hold at 3.75% when they meet next week to consider the impact of rising energy prices on inflation, which fell to 2.8% in April but is expected to rise this summer.