The European Central Bank (ECB) raised interest rates by 25 basis points to 2.25% on Thursday, marking its first hike since 2023. The move comes as the Iran war disrupts energy markets, pushing inflation higher. The ECB cited inflation pressures from the Middle East conflict, projecting 3% inflation in 2026 and 2.3% in 2027. Economic growth forecasts were lowered to 0.8% this year and 1.2% in 2027.
Global Rate Hikes Continue
The ECB joins Australia, Norway, and Japan in tightening monetary policy. Australia’s central bank has raised rates three times this year to 4.35%, the highest in the G10. Norway’s central bank increased rates to 4.25% in May, while Japan’s central bank also tightened policy. The Bank of England is expected to decide on rates next week, with markets pricing in a hike by September.
Energy Crisis Drives Inflation
The closure of the Strait of Hormuz has exacerbated energy price shocks, particularly in Europe. The ECB noted that the war’s impact on inflation and growth depends on the duration and intensity of the energy crisis. The U.S. has been relatively insulated due to domestic energy production, but global markets face rising costs.
Market Reactions
Markets had priced in a near-100% chance of the ECB’s rate hike. Analysts expect further hikes if inflation remains elevated. The ECB emphasized monitoring the situation closely, acknowledging uncertainty in the economic outlook.