The European Central Bank (ECB) has raised interest rates for the first time since 2023 in response to higher inflation caused by the war in Iran. The ECB increased its main deposit rate from 2% to 2.25%, and financial markets are pricing in two more increases by next spring.
Inflation Concerns Mount
Eurozone consumer price inflation rose to 3.2% in May 2026, up from 3% in April, sparking concerns that the conflict in the Middle East will force manufacturers and retailers to push through price increases into the summer and autumn to maintain profit levels. The rate hike is widely seen as an attempt by the ECB to get a grip on inflation at an early stage, after criticism that it delayed rate rises in 2022 amid Russia's invasion of Ukraine.
Peace Deal Remains Elusive
The central bank had held interest rates steady until now, hoping for a peace deal between Donald Trump and Iran that would limit the need for a rise in interest rates to counter inflationary pressures. However, a deal has so far proved out of reach, and oil prices have continued to remain above $90 a barrel, compared with about $70 before the war started.
In March, ECB President Christine Lagarde indicated that a rise in the cost of borrowing would be necessary to limit the increase in inflation. The decision to raise rates was announced after the ECB's governing council meeting in Frankfurt.
The increase is expected to affect borrowing costs for households and businesses across the eurozone, potentially slowing economic growth. Analysts warn that further rate rises could exacerbate the economic slowdown, but the ECB remains focused on curbing inflation.
