Frankfurt – The European Central Bank (ECB) announced a second interest‑rate increase this year on Thursday, raising its benchmark deposit rate to 2.5%. The move targets inflation that has surged past the 3% mark across the 21‑nation euro zone, a rise the bank attributes largely to higher energy costs stemming from the ongoing Iran war.
Energy prices fuel inflation pressure
Rising oil and natural‑gas prices have pushed consumer‑price growth well above the ECB’s 2% target. The bank warned that the conflict in Iran could keep price pressures elevated and eventually seep into wage‑setting, creating additional upward pressure on inflation.
ECB outlook and growth projection
In its statement after the meeting in Berlin, the ECB noted that the outlook remains “highly uncertain,” with upside risks to inflation and downside risks to economic growth. Nevertheless, the central bank modestly lifted its 2026 growth forecast to 0.9% from 0.8% and now expects inflation to average 3.0% this year and 2.5% in 2027.
Policy stance and future moves
The new deposit rate sits at the upper end of the range policymakers consider “neutral” – a level that neither restricts nor stimulates the economy. While market participants are betting on further hikes later this year and into 2027, the ECB signaled it will proceed cautiously, given the mixed outlook.
Resilience in the euro‑zone economy
Despite the inflation surge, economic growth is holding up better than many feared, showing a degree of resilience that could also add upward pressure on prices. Underlying inflation, which strips out volatile food and fuel items, actually slowed last month as services inflation moderated. Wage growth – a key gauge of future price pressures – continues to decelerate.
Energy concerns remain
High energy costs are expected to persist, especially as natural‑gas storage levels sit below historic norms ahead of the winter heating season. The ECB cautioned that these factors could keep inflationary pressures alive, even as the broader price impact on other goods and services remains limited for now.
Bond markets react
Bond yields have risen sharply, reflecting not only the ECB’s rate move but also parallel increases in U.S. Treasury yields and tighter financing conditions. These market dynamics are doing part of the central bank’s work by raising borrowing costs across the economy.
Looking ahead
All eyes now turn to ECB President Christine Lagarde’s press conference at 12:45 GMT, where she is expected to elaborate on the bank’s assessment of inflation risks and the path forward for monetary policy.
Reporting by Balazs Koranyi; editing by Catherine Evans.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
