The European Central Bank increased its benchmark interest rate by 25 basis points on Thursday, setting it at 2.25%. This change comes in response to persistent inflationary pressures associated with ongoing conflict between the U.S. and Iran. This is the first rate hike by the European central bank since 2023.
Prior to the announcement, financial markets had largely anticipated a rate hike at the ECB’s June meeting, with market data suggesting near certainty of at least a 0.25 percentage points increase. According to the central bank, the decision was intended to counter inflation risks stemming from rising energy prices linked to the Iran war.
In its latest projections, the ECB adjusted its euro zone inflation outlook, now forecasting headline inflation to average 3% in 2026. The rate is expected to decline to 2.3% the following year and to meet its 2% target by 2028. The central bank attributed these revisions to higher anticipated energy costs, which are likely to increase expenses across food, goods, and services.
Alongside inflation estimates, the ECB lowered its expectations for economic growth in the euro area. Growth is now projected to reach 0.8% in 2026, rise to 1.2% in 2027, and further improve to 1.5% in 2028.
