ECB Hikes Interest Rates to Combat Inflation Driven by Iran War Energy Costs

The European Central Bank (ECB) raised interest rates for the second time this year in an effort to combat rising inflation driven by higher energy costs from the Iran war.

According to the ECB, surging oil and natural gas prices pushed inflation above 3% across the 21-country euro zone last month, exceeding its 2% target. The central bank also lifted its 2026 economic growth projection to 0.9% from 0.8%, and now sees inflation averaging 3.0% this year and 2.5% in 2027.

The ECB's benchmark deposit rate has been raised to 2.5%, which is at the upper end of the 'neutral' range considered by policymakers to neither restrict nor stimulate economic growth. While financial investors are betting on further hikes later this year and in 2027, the ECB may take its time with any follow-up move due to a mixed outlook.

The bank's decision comes as high energy costs persist despite gas storage levels being below historic norms ahead of the winter heating season. Economic growth is holding up better than expected, but underlying inflation, which filters out volatile food and fuel prices, slowed last month on moderating services inflation.