ECB Raises Interest Rates to Combat Inflation Driven by Energy Costs

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

Surging oil and natural gas prices pushed inflation above 3 percent across the 21-country euro zone last month, exceeding the ECB's 2 percent target. Energy costs have yet to filter down into other goods and services, but underlying inflation slowed last month on moderating services inflation.

The ECB lifted its benchmark deposit rate to 2.5 percent, the upper end of the 'neutral' range considered by policymakers. It also raised its 2026 economic growth projection to 0.9 percent from 0.8 percent seen in June and sees inflation averaging 3.0 percent this year and 2.5 percent in 2027.

Economic growth is holding up better than feared, indicating a resilience that could also put upward pressure on prices. Bond yields have increased sharply, mostly reflecting similar rises for US Treasuries, tightening financing conditions and doing some of the central bank's work for it.