ECB expected to raise interest rates for first time in nearly three years as Middle East conflict fuels inflation

ECB expected to raise rates after nearly three years

The European Central Bank is set to raise its key interest rates for the first time since September 2023 later today, lifting the deposit facility rate by 25 basis points to 2.25%. The move has been broadly telegraphed by ECB officials and is priced at a 100% probability by market monitors such as ECB Watch. President Christine Lagarde has guided towards action since March, when she said that

the public may find it difficult to understand a reaction function that does not react.

Euribor already discounts the hike

The 12-month Euribor, the benchmark for most Spanish variable-rate mortgages, has anticipated the change and climbed steadily since the outbreak of war in the Middle East. In March it stood at 2.229%, then rose to 2.845% in April and 2.883% in May. By early June it eased to 2.761%, but the latest reading on 8 June was 2.816%.

The Euribor anticipates, it does not follow. An expected hike does not have to move it strongly.

Mortgage costs climb

For households with variable-rate loans, the effect is already tangible. Olivia Feldman, co-founder of HelpMyCash, calculates that a typical €150,000 mortgage over 25 years with a euribor plus 1% differential now costs around €58 more per month compared to one year ago, adding close to €700 in extra annual payments.

Those seeking a mortgage face an unusual situation: very high house prices and very high financing costs.

Jorge González-Iglesias Baeza, CEO of Gibobs.com, advises that

the Euribor will react upwards. The cycle has changed direction. Whoever has not yet fixed their mortgage should do so as soon as possible. Current conditions are still good, but the window is closing.

Inflation and the war premium

The immediate trigger for the rate turnaround is a spike in inflation, which reached 3.2% in May, up abruptly from 1.7% in January. The sharp increase traces back to the conflict that erupted between the United States, Israel and Iran more than 100 days ago, blocking the Strait of Hormuz and driving oil prices from roughly $60 to $100 per barrel. ECB board member Isabel Schnabel, widely considered the most hawkish voice on the Governing Council, stated bluntly:

Given the magnitude and persistence of the current crisis, in my opinion it will be necessary to raise interest rates in June.

A preventive strike, not a new cycle

Analysts at fintech Ebury describe the move as “mainly preventive, aimed at anchoring inflation expectations, rather than opening a new tightening cycle.” The ECB's own baseline forecasts see inflation at 2.6% for 2026, with GDP growth trimmed to 0.9%. However, if the Strait of Hormuz remains blocked and the war escalates, the ECB’s adverse scenario envisages inflation surging to 4.4% and the economy virtually stagnating at 0.4% growth. Such outcomes would likely force further rate increases; markets currently price in between two and three additional quarter-point moves this year.

Looking ahead

Beyond the immediate rate decision, the ECB will also update its economic projections and Lagarde’s press conference will be scrutinized for hints about the pace of future tightening. Meanwhile, in the corridors of the Eurotower in Frankfurt, the succession for Lagarde, whose term is approaching its end, is quietly being discussed, with a former Spanish central bank governor reportedly among the candidates. For now, the focus is on the first hike in over 1,000 days and its cascading impact on borrowing costs across the eurozone.