ECB raises eurozone rates by 25 basis points, first hike since 2023

The European Central Bank raised interest rates on Thursday for the first time since 2023, lifting its deposit facility rate from 2% to 2.25% as policymakers responded to a new inflation shock linked to the Middle East war.

The increase was widely expected by markets, but it marks a significant shift in the ECB's stance after a prolonged pause. The bank also raised its main refinancing rate to 2.4% and its marginal lending facility to 2.65%.

Eurozone consumer inflation was reported at 3.2% in May, up from 3% in April. Officials said higher energy prices were feeding into the outlook as the conflict in the Middle East pushed up concerns about oil and transport costs.

Why the ECB moved

The ECB has been trying to balance two risks at once: inflation reigniting and growth weakening further. Before this meeting, rates had been left unchanged while policymakers watched the fallout from the Middle East conflict and the possible transmission of higher energy costs into the wider economy.

That calculation shifted as the inflation picture worsened. According to the ECB's updated assessment, the decision was robust across several scenarios, suggesting officials believed the risk of doing too little now outweighed the danger of tightening into weakness.

The move is the first increase since September 2023 and ends a long stretch without a hike. It also underscores how quickly energy prices can feed into monetary policy in the euro area.

Forecasts and growth

Alongside the rate decision, the ECB revised its inflation forecasts upward for 2026 and 2027 because of a higher energy-price path. At the same time, it lowered its growth outlook.

Baseline euro-area growth for 2026 was reported at 0.8%, a sign that policymakers see the bloc entering the tightening cycle from a weak economic position. The shift means the ECB is now trying to cool inflation without aggravating sluggish activity.

That trade-off matters for households, firms and governments across the currency bloc. Higher borrowing costs can feed through to mortgages, business loans and public borrowing costs, while weaker growth can already make credit conditions feel tighter.

What markets are watching

Bond yields moved higher after the announcement, reflecting both the rate change and the prospect that the ECB may need to stay alert to further inflation pressure if energy prices remain elevated.

For now, the key question is whether this is a one-off response to a temporary shock or the start of another tightening cycle. Investors will be listening closely to Christine Lagarde's press conference for any guidance on how long policymakers expect to hold this new stance.

What happens next

The next trading sessions will show how the euro, bond markets and bank lending rates react to the move. Economists will also be watching incoming inflation and growth data through the summer for signs that the ECB's revised forecasts are holding.

The biggest uncertainty is whether higher energy costs spread beyond headline inflation into food, goods and services prices. If that happens, the central bank may face pressure to tighten again even as growth remains weak.