ECB Hikes Interest Rates to 2.5% Amid US-Iran Tensions Fuel Inflation

The European Central Bank (ECB) has raised interest rates to 2.5%, its highest level in nearly two decades, amid warnings that renewed fighting between the US and Iran is fueling inflationary pressures.

The move was widely expected by investors, but they were caught off guard by the ECB's hawkish tone, which warned of rising energy prices and their potential impact on the economy.

Oil prices surged to over $105 per barrel, while gas prices in the UK rose to a 19-year high. The interest rate on benchmark 10-year government bonds also hit its highest level since August 2007.

ECB President Christine Lagarde said that headline inflation is expected to return to around target towards the end of 2027, supported by higher interest rates.