European Central Bank Raises Interest Rates to Combat Inflation
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- The European Central Bank (ECB) has raised its benchmark deposit rate by 0.25 percentage points to 2.25% to counter inflation, which has reached 3.2% in the eurozone, exacerbated by the Iran war and its impact on oil and gas transit.
- The move aims to curb demand and ease price pressures despite risks to the eurozone's weak economy.
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The European Central Bank has raised interest rates for the first time in nearly three years to counter inflation linked to the Iran war.
The move, which risks placing further strain on the eurozone's weak economy, highlights mounting concern over rising prices.
What was the ECB rate rise?
Policymakers in Frankfurt lifted the benchmark deposit rate by 0.25 percentage points to 2.25%, ending a long pause after seven consecutive holds at 2.0%.
he ECB has faced a delicate balance between containing inflation and avoiding a deeper economic slowdown.
The last rate hike in the eurozone came in September 2023. Higher rates typically make borrowing more expensive for households and businesses, helping to curb demand and ease price pressures, while offering improved returns for savers.
At a post-decision news conference, ECB President Christine Lagarde said the bank was "well positioned to navigate the uncertainty caused by the war."
She said the bank would "closely monitor the situation and follow a data-dependent and meeting-by-meeting approach."
What did the ECB say about the rate rise?
Announcing the increase, the ECB said: "the war in the Middle East is generating inflation pressures."
Since the start of the US-Israeli war against Iran, eurozone inflation has jumped to 3.2% in May, well above the ECB's 2% target. The Strait of Hormuz, a crucial transit route for oil and gas, remains almost completely closed.
"The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth," the bank said.
"The full implications 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" effects.
The bank also raised its inflation outlook for this year while trimming growth expectations.
Policymakers revised their forecast to 3% inflation, up from 2.6% in March, and lowered their eurozone growth projection to 0.8% from 0.9%.
Edited by: Sean Sinico
