The European Central Bank raised its main deposit rate by 25 basis points to 2.50% on Thursday, while warning that the Middle East conflict will keep inflation well above its 2% target for an extended period.
In its official statement, the ECB said the conflict "continues to generate inflation pressures." The decision comes in the war's seventh month, which began in late February following the start of hostilities involving Iran.
ECB President Christine Lagarde said during a post-decision press conference that the "energy shock" caused by the Iran war could intensify further and that secondary effects on other prices and wages may prove stronger than anticipated.
Brent crude climbed back above $100 a barrel, trading at $101.75, as global shipping disruptions weighed on energy markets. Prior to the war, roughly a fifth of the world's oil and liquefied natural gas passed through the Strait of Hormuz.
Germany's 10-year bond yield hit its highest level since the Eurozone economic crisis in 2011, while France's 10-year yield floated around a post-2008 peak. Gas prices also touched their highest point since 2023.
The ECB revised its inflation forecasts upward, now expecting headline inflation to average 3.0% this year. Forecasts for 2027 and 2028 were lifted to 2.5% and 2.1%, respectively.
Lagarde described the Eurozone economy as "resilient," noting a robust labor market, a bouncing-back services sector, and conditions expected to persist into the third quarter.
Traders are pricing in another rate increase by this time next year, with Reuters data showing a 40% probability of a further uptick. Capital Economics analysts, including Andrew Kenningham, called the ECB's statement "somewhat hawkish" and said they now "think one more hike is likely" in 2026.
