The European Central Bank raised its main deposit rate from 2% to 2.25%, marking its first rate increase since 2023. Financial markets anticipate two additional rises by next spring as the central bank confronts surging inflation linked to the ongoing war in Iran.
Eurozone consumer price inflation climbed to 3.2% in May 2026, up from 3% in April, well above the ECB's 2% target. The conflict in the Middle East has disrupted energy supplies and pushed oil prices above $90 per barrel, compared with roughly $70 before the war began. Energy costs are now feeding through to broader price pressures as manufacturers and retailers seek to maintain profit margins.
The ECB also raised its main refinancing rate to 2.4% from 2.15%. The decision represents a shift in strategy after the central bank held rates steady in hopes that the United States and Iran would reach a peace agreement. That outcome has not materialized, forcing policymakers to act.
ECB President Christine Lagarde acknowledged the uncertainty surrounding the conflict's economic impact. "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 move comes after criticism that the ECB delayed rate increases in 2022 following Russia's invasion of Ukraine, allowing inflation to become more entrenched. Officials had considered "looking through" the initial energy price spike from the Middle East conflict, but mounting evidence that higher oil and gas prices were already accelerating inflation prompted the change in approach.
The central bank trimmed its growth forecasts for the eurozone to 0.8% in 2026 and 1.2% in 2027, down from previous projections of 0.9% and 1.3%. "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," Lagarde stated, warning that prolonged energy supply disruptions could push prices higher for longer than currently expected.
Mark Wall, chief European economist at Deutsche Bank, called this 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," he said. However, Wall cautioned that markets may be overestimating the rate-hiking cycle. He predicted one additional increase in September but not the multiple hikes markets were pricing in, given weakness in employment and growth.
The Bank of England is expected to hold rates at 3.75% at its next meeting, while the Federal Reserve is also anticipated to pause despite the highest inflation in the G7 at 4.2%.