The European Central Bank (ECB) has raised interest rates for the first time since 2023, responding to rising inflation driven by higher energy prices linked to the ongoing conflict involving Iran. The move makes the ECB the first major central bank in the developed world to increase borrowing costs since the latest global inflation surge began.
The ECB increased its key deposit rate by 25 basis points, taking it from 2% to 2.25%. The decision was widely expected by financial markets but signals growing concern among policymakers about the economic impact of the Middle East conflict.
ECB President Christine Lagarde said the war in the Middle East is creating inflationary pressures across the eurozone. Rising oil and energy prices have pushed inflation above the ECB’s target of 2%, forcing the central bank to act despite signs of weakening economic growth.
Recent data showed eurozone inflation climbing to around 3%, largely due to higher energy costs caused by disruptions linked to the Iran conflict. At the same time, economic growth in the region has slowed, creating a difficult balancing act for policymakers.
The ECB also revised its economic forecasts, raising inflation expectations while lowering growth projections. Officials warned that continued geopolitical tensions could further increase prices and weigh on business activity across Europe.
Investors now expect at least one additional rate increase later this year if inflation remains elevated. However, some economists believe the ECB may be cautious about further tightening because higher borrowing costs could put additional pressure on the already fragile eurozone economy.