ECB Hikes Interest Rates for First Time Since 2023 As Iran War Ramps Up Energy Costs

• The European Central Bank (ECB) announced a quarter-point rate hike on Thursday, bringing its key interest rate to 2.25% as the Iran war continues to blow inflation off target. Markets had been pricing in a near-100% chance of the ECB raising rates by at least 25 basis points ahead of its June Governing Council meeting, according to London Stock Exchange Group (LSEG) data.
• The ECB’s Governing Council said the decision had been made in a bid to ward off inflationary pressures generated by the U.S.-Iran war. The central bank also raised its inflation forecasts, saying it now expects headline inflation in the euro zone to average 3% in 2026 before cooling to 2.3% next year and 2% in 2028. It said the outlook had been altered in response to expectations of higher energy prices, which are expected to feed on the cost of food, goods and services.
• Economic growth forecasts, meanwhile, were revised downward for this year and next year. The ECB now expects growth in the euro zone to average at 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028. Officials said the growth outlook had been trimmed to reflect “a more pronounced impact of the war on commodity markets, real incomes and confidence.”
• The ECB said that its Governing Council “remains well positioned to navigate the uncertainty caused by the war,” and will closely monitor the situation — but it stressed that officials are “not pre-committing to a particular rate path.” Euro zone inflation rose to 3.2% in May, flash data showed earlier this month, as higher energy costs drove the region’s inflation rate further above the ECB’s 2% target. The eurozone economy grew by just 0.1% in the first quarter of the year.

(Source: Reuters)