The European Central Bank has raised interest rates for the first time since 2023 in response to higher inflation caused by the war in Iran.
ECB pivoted towards monetary tightening at its Jun-26 meeting, raising its benchmark deposit rate by +25bps to 2.25%. This marks the first rate hike since 2023 as policymakers aggressively moved to anchor medium-term inflation expectations at their +2.0% target. This significant policy shift was explicitly triggered by escalating energy costs and the supply-side inflation risks stemming from the ongoing conflict in West Asia and subsequent disruptions to global oil shipments through the critical Strait of Hormuz.
Acknowledging that the Middle East conflict is actively amplifying domestic price pressures, the Governing Council noted that the hike was robustly supported across multiple macroeconomic impact scenarios. The ECB also revised its inflation forecasts upward, now expecting headline inflation to reach +3.0% in 2026 (up from +2.6%) and +2.3% in 2027 (up from +2.0%). Core inflation was also raised to +2.5% for both 2026 and 2027, from previous estimates of +2.3% and +2.2%, respectively. For economic growth, the ECB slightly lowered its eurozone GDP projections, forecasting expansion of +0.8% in 2026 (down from 0.9%) and +1.2% in 2027 (down from +1.3%)
ECB President Christine Lagarde underscored that the broader economic and inflation trajectory remains highly uncertain as long as geopolitical tensions continue to inflate energy inputs. In our view, this landmark decision represents a critical inflection point in global monetary policy. HLIB noted that the move is a significant decision, as the ECB has held rates since 2023. It is also a hike by one of the major global central banks as a result from the change in the inflation outlook triggered by the supply disruption.
