ECB raises rates for first time in 3 years, citing Middle East inflation risk

The European Central Bank raised its benchmark interest rate Thursday for the first time in nearly three years, moving preemptively to contain inflation before a surge in energy prices triggered by the war involving Iran spreads more broadly across the eurozone.

In a statement, the ECB said "the Middle East war is intensifying inflationary pressures," adding that the rate decision followed a review of multiple scenarios examining how the shock could affect the eurozone's medium-term outlook.

The ECB's deposit rate rose 25 basis points to 2.25% from 2.0%. It was the bank's first rate increase since September 2023.

Markets had long anticipated the move, as inflation across the 21 countries that use the euro has been running well above the ECB's 2 percent target. Calls for a rate hike had been growing within the bank since April. Reuters said the ECB had "finally acted."

Alongside the rate decision, the ECB revised its inflation forecasts upward for this year and next. Under the updated projections, the bank sees inflation at 3.0 percent this year, 2.3 percent in 2027 and 2.0 percent in 2028.

"Upside risks to inflation and downside risks to growth exist simultaneously," the ECB said, noting that the war's impact on medium-term prices and growth would depend on the severity and duration of the energy price shock and the scale of any second-round effects.

The ECB offered no guidance on the future path of interest rates, as is customary. Anatoli Annenkov, an economist at French investment bank Societe Generale, said two additional hikes this year appeared to be "the minimum scenario," adding that while markets would begin pricing in a July increase, many policymakers would likely prefer to wait for more data until September.