The European Central Bank raised its key interest rates on Thursday, lifting the deposit rate to 2.25% and the main refinancing rate to 2.4%. The widely anticipated move comes as eurozone inflation climbed above 3%, driven by rising energy costs linked to the Middle East conflict. The ECB’s policy statement warned that the war is generating persistent inflation risks, justifying tighter monetary policy.
Alongside the hike, the ECB revised its inflation forecasts upward, now expecting 3.0% in 2026 (up from 2.6%) and 2.3% in 2027. At the post‑meeting press conference, President Christine Lagarde stressed that future decisions remain data‑dependent, with no pre‑committed path. She highlighted that while headline inflation has eased, core pressures—especially services and wages—remain sticky. Lagarde also urged swift adoption of the digital euro regulation and noted the labour market’s resilience, despite cooling demand.
The central bank faces a delicate balance: containing inflation while growth forecasts were trimmed to 0.8% for 2026. Lagarde acknowledged that the full impact of the conflict on inflation and growth hinges on the energy shock’s duration and second‑round effects. Markets lowered bond yields and the euro weakened slightly, interpreting the tone as cautious and nearing the end of the tightening cycle. The ECB’s next steps will be guided solely by incoming data, not calendar dates.
