ECB poised to raise rates as Iran war stokes eurozone inflation to 3.2%
The European Central Bank is expected to increase its deposit rate by a quarter-point to 2.25% on Thursday, the first hike since September 2023, as the Iran war sends energy costs soaring and pushes eurozone inflation to 3.2 percent.
The European Central Bank is poised to raise borrowing costs this Thursday for the first time in nearly three years, as the war in Iran drives energy prices higher and pushes eurozone inflation to 3.2 percent. The Governing Council is expected to lift the deposit rate from 2.00% to 2.25%, a decision it will announce at 14:15 Frankfurt time, with President Christine Lagarde addressing the press at 14:45.
Inflation surge
Eurostat data released last week showed consumer prices accelerating to 3.2% in May from 3.0% in April, well above the ECB's 2% target. The jump comes as the Strait of Hormuz, a vital oil transit route, remains mostly closed, inflating energy costs for households and businesses across the 21-nation currency bloc.
- April 2026
- 3 %
- May 2026
- 3.2 %
Divided boardroom
While several influential council members have publicly signaled support for a quarter-point hike, the decision exposes a rift.
Schmieding, Berenberg's chief economist, said the central bank "is about to make a mistake." Other economists highlight the risk that a supply-driven price shock will not respond to monetary tightening and that the fragile eurozone economy, already contracting in the first quarter, could be pushed into recession.The last thing the eurozone needs is a further headwind in the form of higher interest rates to exacerbate the Iran war damage.
Schumacher, chief economist at KfW, expects the ECB to frame this move as a one-off "insurance" step rather than the start of a hiking cycle.A clear signal for a further tightening of monetary policy will be absent.
Global context
The ECB's move would make it the first major central bank to raise rates in response to the Iran conflict. The US Federal Reserve and the Bank of England, both due to meet next week, have held off so far while assessing the fallout.
Updated projections
Alongside the rate decision, the ECB will publish fresh economic forecasts. Analysts expect an upgrade to the inflation outlook and a downgrade to growth projections from the March baseline of 2.6% inflation for 2026.
An increase in the central bank's key deposit rate from 2.00 to 2.25 percent seemed like a done deal.
