ECB raises interest rates for first time since 2023 as Iran war fuels inflation

The European Central Bank has ended its long pause on interest rates, lifting all three key rates by 0.25 percentage points at its June meeting. The deposit rate, the benchmark most relevant for savers and financial markets, now stands at 2.25%. The main refinancing rate rises to 2.4%, and the marginal lending rate to 2.65%.

The inflation trigger

Eurozone consumer prices rose 3.2% year-on-year in May, according to preliminary figures from Eurostat, accelerating from 3.0% in April and well above the ECB's 2% target. In February, before the Iran conflict escalated, inflation stood at just 1.9%. The oil price shock from the war and the blocked Strait of Hormuz has driven up fuel and energy costs, which are now feeding through to other prices. Core inflation, which strips out volatile energy and food prices, climbed from 2.2% to 2.5%. Services inflation jumped to 3.5% from 3.0%.

A rate increase in June is necessary.

A preemptive move

ECB President Christine Lagarde had repeatedly signalled the central bank's readiness to act. The Governing Council, which had kept rates unchanged for seven consecutive meetings, moved to prevent what central bankers call an "unanchoring of inflation expectations." ECB surveys of households and businesses had already shown markedly higher inflation expectations, with both groups appearing more sensitive to price shocks after the 2022 inflation surge, when the rate peaked at 10.6%.

The ECB stands ready to act if necessary.

Economic headwinds

The rate increase lands in a fragile economy. The eurozone contracted in the first quarter of 2026, and Germany managed only 0.3% growth according to Eurostat. Deutsche Bank has slashed its full-year 2026 growth forecast for the currency bloc to 0.5%, down from 1.1% in its November projection. Critics argue the rate hike punishes an already weak economy while doing little to address a supply-side oil shock that the ECB cannot resolve directly.

Winners and losers

Savers stand to benefit. According to comparison portal Verivox, two-year fixed-term deposits available nationwide in Germany already average 2.3%, with some banks offering up to 4% on overnight deposits for new customers. Verivox managing director Oliver Maier expects conditions to improve further. Borrowers face a different reality: the platform calculates that banks have historically passed on 61% of ECB rate increases to loan customers, but only 9% of rate cuts. Instalment loans, overdraft facilities, and mortgage financing are all expected to become more expensive.

In that case, the rise in fixed-term deposit rates is likely to continue at a similar pace as recently.

What comes next

Whether further rate increases follow depends heavily on developments in the Persian Gulf. Some economists expect more than one hike this year. The ECB's decision comes a week before the US Federal Reserve, now chaired by Kevin Warsh, holds its own rate-setting meeting, and a day before the Swiss National Bank convenes.