ECB raises interest rates for first time in 3 years as inflation hurts euro zone economies

The European Central Bank (ECB) raised interest rates by 25 basis points on Thursday, June 11, marking its first rate increase since 2023, as escalating conflict involving Iran drives energy prices higher and reignites inflationary pressures across the euro zone.

The ECB increased its key deposit rate to 2.25%, citing concerns that surging oil and gas costs linked to the ongoing war are pushing inflation further above the central bank’s target.

Financial markets had fully priced in the move ahead of the ECB’s June Governing Council meeting, with LSEG data showing investors saw a near-100% probability of at least a quarter-point increase.

In a statement accompanying the decision, the ECB’s Governing Council said the rate hike was aimed at countering inflationary pressures stemming from the US-Iran war.

“The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area,” the ECB said.

The central bank also revised its inflation projections higher, forecasting headline inflation in the euro zone to average 3% in 2026 before easing to 2.3% in 2027 and returning to its 2% target in 2028.

According to the ECB, the updated outlook reflects expectations that higher energy prices will filter through to the costs of food, goods and services across the economy, cited by CNBC.

At the same time, policymakers lowered their growth forecasts for this year and next. The ECB now expects the euro zone economy to expand by 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028.

Officials said the weaker growth outlook reflects “a more pronounced impact of the war on commodity markets, real incomes and confidence.”