ECB Hikes Interest Rates Again Amid Ongoing Middle East Conflict

The European Central Bank (ECB) has raised interest rates for the second time this year to combat rising inflation caused by energy price surges, driven by the ongoing conflict in the Middle East. The main deposit rate was increased by a quarter of a percentage point to 2.5%, its highest level since March 2025. This move comes as the ECB expects inflationary pressures to persist into 2027, with a projected 2.5% inflation rate for that year, up from the previously forecast 2.3%. The growth forecast has been revised up to 0.9% for 2026 and 1.4 per cent for 2027.

The ECB's decision was made in response to soaring energy prices, which have pushed inflation in the euro area to 3.3% in August, its highest level in three years. Core inflation, excluding energy and food prices, eased slightly to 2.4% year-on-year. The bank fears that the current energy shock could spread to the broader economy through second-round effects, such as higher wages and business prices.

The ECB's move is aimed at curbing demand gradually and limiting companies' ability to raise their prices. By raising interest rates, it increases the cost of mortgages, business loans, and public borrowing.