ECB Hikes Interest Rates Amid Energy Shock, Opens Door for Further Tightening

The European Central Bank (ECB) has raised interest rates for the second time this year in response to renewed Middle East conflict and its impact on energy prices. The benchmark rate was increased by a quarter percentage point to 2.5%, its highest level since March last year.

According to ECB President Christine Lagarde, the conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period. She said that the near-term economic outlook had 'improved', adding that 'we have been surprised by the resilience of our economy.'

The ECB also raised its growth forecasts for this year to 0.9% and for next year to 1.4%, indicating that the eurozone economy has withstood the energy shock better than feared.

Lagarde's comments have been interpreted as 'hawkish', suggesting a tilt in favour of further interest rate hikes to combat inflation. Fears of higher inflation are being driven by rising global energy prices, including Brent international oil and natural gas prices, which have reached their highest level in more than three years.