European Central Bank raises interest rates to combat inflation

The European Central Bank (ECB) raised interest rates on Thursday, hoping to curb rising inflation driven by higher energy costs stemming from the war between the US and Iran. This is the second increase that the ECB has had to implement this year. Risingoil and natural gas prices pushed inflation above 3% in the 21-country eurozone, surpassing the previous target of 2%.

"The outlook remains highly uncertain, with risks to the upside of inflation and to the downside of economic growth," the ECB said in a statement after its annual meeting, held this year in Berlin.

The ECB also announced its economic growth projection for 2026. The study reveals slight growth of 0.9% compared to 0.8% in June, and inflation is now expected to average 3.0% this year and 2.5% in 2027.

Without a clear resolution to the US-Israel conflict with Iran, which began in late February, energy costs continue to rise, suggesting persistent inflation. There is also growing concern about gas storage levels, which remain below historical norms as the winter heating season approaches.

Economic outlook remains uncertain

"The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period," according to the ECB.

For countries in the eurozone, another hike in rates means more expensive mortgages, consumer credit, and loans. There has been little indication that eurozone inflation is being passed more broadly through the economy via higher prices for food, goods, or services.

Experts say the European Central Bank is worried about raising rates too slowly again. The last time it needed to take measures at this pace was in 2022, following Russia's full-scale invasion of Ukraine.

"The inflation outlook has worsened over the summer," said Sylvain Broyer, chief economist for Europe, the Middle East, and Africa at S&P. "Supply shocks are not only multiplying, but it is increasingly likely that demand is also contributing to inflation," he said.