ECB raises rates by 0.25 points to 2.25% as Middle East conflict drives eurozone inflation to 3.2%

The decision

The ECB’s governing council raised all three main rates by a quarter of a percentage point. The deposit rate, its policy benchmark, now stands at 2.25%, while the main refinancing rate is 2.40% and the marginal lending facility rate is 2.65%. The last time the Frankfurt-based institution tightened was in September 2023; rates had been on hold since a cut in July 2025.

“This 25-basis-point rise, approved by unanimous decision, is clearly a signal and is necessary given the uncertainty and the inflation outlook.”

Why now

Inflation in the eurozone accelerated from 1.9% in February — the last month before the outbreak of the US-Israeli war against Iran — to 3.2% in May, well above the ECB’s 2% target. Energy prices are the main driver after the Strait of Hormuz was blocked. The central bank now projects inflation of 3.0% in 2026 (up from an earlier estimate of 2.6%) and 2.3% in 2027, before falling back to 2.0% in 2028. Growth forecasts were trimmed to 0.8% for 2026.

2026-02

1.9 %

2026-05

3.2 %

2026 (proj.)

3 %

2027 (proj.)

2.3 %

2028 (proj.)

2 %

Data from the article text

Transmission to the real economy

Higher policy rates feed through to commercial bank lending. "When a central bank raises the rate it offers banks that deposit money, the principle is that it raises interest rates for the rest of the economy," said Eric Dor, director of economic studies at IESEG. Brokers report that a €15 monthly increase in repayments could shrink a household’s borrowing capacity by €5,000-6,000. Savers may benefit from a higher Livret A rate, but an OECD economist warned that encouraging saving over consumption could dampen growth.

“It is like tightening the screw and slowing activity even further.”

Criticism of the move

Several economists argued the rate rise was ill-timed. Frederik Ducrozet, chief economist at Pictet Wealth Management, said: "It seems at the very least strange to raise rates in the middle of stagflation. Unless I am badly mistaken, a rate hike will not reopen the Strait of Hormuz." Eric Dor echoed that it "risks amplifying the contraction in activity" while being "ineffective in lowering inflation" that is driven by imported energy costs.

Global central bank picture

The ECB is the first major central bank to react to the Middle East shock with a rate increase. The Bank of England is expected to hold its rate at 3.75% when it meets on 18 June. The Bank of Japan has been on pause since raising to 0.75% in December 2025. Lagarde defended the move, saying "the main risk would have been not to take this kind of decision" and stressing that the eurozone economy was not "seriously threatened" with recession.