ECB hikes rates to 2.25% as Iran conflict stokes inflation concerns
Jun 11, 2026
The European Central Bank raised interest rates for the first time in almost three years, concluding it can no longer wait out the Iran war as inflation pressures intensify.
The deposit rate was lifted to 2.25 per cent from 2 per cent , as anticipated by economists and investors who foresee another quarter-point move in September. The ECB reiterated it won’t pre-commit but said it remains well positioned to navigate the current unpredictability.
“The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth,” it said in a statement. “The full implications of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects.”
European bonds held gains after the announcement, with the 10-year yield three basis points lower at 3.05 per cent . The euro was steady against the dollar at $1.1538.
Thursday’s hike is the first policy reaction by a major central bank to the jump in oil prices triggered by the Middle East conflict. With the fighting now in its fourth month, officials in the euro area worry that inflation is broadening beyond energy and won’t simply be tamed by a US-Iran peace deal, even if one materializes soon.
Those fears are reflected in fresh quarterly projections showing consumer prices advancing more quickly this year than previously envisaged, before easing back to the 2 per cent target in 2028. But underscoring the bind for the ECB, the new outlook also points to dwindling economic growth as inflation and higher borrowing costs sap buying power.
“The war in the Middle East is weighing on activity, and surveys are pointing to a slowdown, especially in services,” President Christine Lagarde told reporters in Frankfurt. “The increase in energy prices will lift inflation further over the summer and keep it well above target into the first half of 2027.”
The ECB came close to acting in April and even some of its most dovish policymakers suggested in the run-up to this week’s meeting that there’s now no real alternative.
They still have vivid memories of 2022, when Russia’s attack on Ukraine ignited a record bout of inflation and the ECB was accused of dragging its feet in responding. During that episode, the deposit rate eventually reached 4 per cent before being cut from mid-2024.
This time around officials have an even closer eye on inflation expectations, which have risen substantially. Some fear worse is to come due to the damage inflicted on energy infrastructure in the Gulf as well as friction within global supply chains.
Other Group of Seven nations are less eager to step in. The Bank of Canada kept borrowing costs unchanged on Wednesday. Next week, the Federal Reserve and the Bank of England are also likely to stand pat, while the Bank of Japan is expected to continue a gradual tightening cycle that started last year.
[Bloomberg]
