The European Central Bank (ECB) has resumed interest rate increases after nearly three years, raising borrowing costs by 0.25 percentage points to 2.25%. The decision, taken at its latest policy meeting in Frankfurt, marks a shift in monetary policy driven by renewed inflationary pressures linked to rising energy costs and ongoing geopolitical tensions.
The move comes as the ECB points to the economic impact of a continuing conflict in the Middle East and the resulting strain on global energy markets. More than 100 days after the start of bombings on Tehran, officials noted there is no immediate prospect of a peace agreement. The prolonged instability, combined with disruptions affecting the Strait of Hormuz, has raised concerns that higher energy prices could gradually feed into broader inflation across the eurozone economy.
In its accompanying statement, the ECB acknowledged that “the war in the Middle East is generating inflationary pressures.” The central bank also released updated economic projections, revising its inflation forecasts upward for the coming years. Inflation expectations for 2026 were increased from 2.6% to 3%, while projections for 2027 were also raised from 2% to 2.3%. The ECB now expects inflation to return to its 2% target only by 2028.
Despite the inflationary outlook, the ECB’s updated forecasts for economic growth remain modest but positive. The central bank expects eurozone gross domestic product to grow by 0.8% this year, with a gradual acceleration in the following years. Growth is projected to reach 1.2% in 2027 and 1.5% in 2028, although these figures were slightly revised downward, reflecting weaker economic conditions.
Officials attributed the weaker outlook to the broader economic consequences of the conflict, including higher commodity prices, reduced real incomes, and declining consumer confidence. The ECB noted that these factors are likely to weigh on demand across the currency bloc even as inflationary pressures persist.
The rate increase is not being interpreted as the start of a sustained tightening cycle, but rather as a targeted adjustment in response to specific external shocks. Market expectations still suggest the possibility of at least one additional rate hike before the end of the year, although analysts note that the current environment differs significantly from the inflation surge triggered by the war in Ukraine, which led to a prolonged series of rate increases.
ECB President Christine Lagarde is expected to provide further details at a press conference in Frankfurt, where she will appear alongside the institution’s new vice president, Boris Vujčić. The briefing is expected to clarify the central bank’s assessment of inflation risks and its approach to balancing price stability with slowing economic momentum across the eurozone.
