ECB raises rates for the first time in nearly three years as Iran war reignites inflation

The decision

The European Central Bank raised interest rates by 25 basis points on Thursday, lifting the deposit facility rate to 2.25%, the main refinancing operations rate to 2.40%, and the marginal lending facility rate to 2.65%. The move, the first rate increase since September 2023, was widely anticipated by markets and analysts after weeks of signals from Governing Council members.

The war in the Middle East is generating inflationary pressures and the decision to increase interest rates is appropriate across the different scenarios analysing the possible evolution of the disturbance and its impact on the medium-term outlook for the euro area.

The last rate hike occurred in September 2023, when the ECB pushed the deposit rate to 4%. After a pause, the bank began a cutting cycle in June 2024 that ended in June 2025, leaving rates frozen until Thursday's reversal.

The inflation trigger

Eurozone inflation reached 3.2% in May, the highest level in nearly three years and well above the ECB's 2% target. The bank also revised its inflation forecasts upward: the 2026 projection rose from 2.6% to 3%, and the 2027 outlook moved from 2% to 2.3%. The ECB does not expect inflation to return to target until 2028.

Given the magnitude and persistence of the current crisis, in my view it is no longer possible to ignore the situation. From the current perspective, I believe it will be necessary to raise interest rates in June.

The energy shock stems from the closure of the Strait of Hormuz by Iran in retaliation for US and Israeli attacks that began on 28 February. The blockade has curtailed oil exports and driven up energy costs across the eurozone.

Market and analyst expectations

Markets had fully priced in the quarter-point increase. The Euribor, the benchmark for variable-rate mortgages, has been climbing in anticipation and now sits around 2.8% in June, a 20-month high. Analysts at Carmignac noted that households and businesses have become more sensitive to price pressures after repeated inflationary crises, with inflation expectations now reacting more quickly to upside surprises.

Some analysts expect up to two additional rate increases before the end of summer, while others believe Thursday's tightening may be sufficient to signal resolve without launching a new hiking cycle. The ECB stressed it will maintain a data-dependent, meeting-by-meeting approach.

Impact on mortgages and savings

The rate increase feeds directly into borrowing costs. A variable-rate mortgage of €174,000 over 30 years at Euribor plus 0.99% would see monthly payments rise by approximately €72, or nearly €860 per year, upon revision. The impact is larger for borrowers in the early years of their loan.

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

Fixed-rate and mixed mortgages are consolidating among new borrowers. Jorge González-Iglesias, CEO of Gibobs, advised that anyone who has not yet locked in a mortgage should do so as soon as possible, noting the cycle has changed direction.

Growth concerns and the stagflation risk

The eurozone economy contracted by 0.2% in the first quarter, raising the spectre of stagflation. The ECB must balance preventing inflation from spiralling while avoiding further cooling of an already decelerating economy. Unlike the Federal Reserve, which also has an employment mandate, the ECB's sole focus is price stability.

Christine Lagarde will hold a press conference at 14:45, her first joint appearance with the new Vice President, Croatia's Boris Vujčić. The tone of that briefing will be scrutinised for clues on whether Thursday's move is a one-off adjustment or the start of a broader tightening cycle.