The European Central Bank raised interest rates on Thursday, increasing borrowing costs as energy markets and inflation point in opposite directions to a weaker economic outlook. The move was the ECB’s second rate increase this year and follows a rise in oil and natural gas prices that has taken inflation above 3% in the 21-country eurozone.
The decision puts the ECB’s 2% inflation target further from reach as the winter heating season approaches. Gas storage levels remain below historical norms, while higher energy costs have stemmed from the war between the US and Iran, which began in late February.
In its statement, the ECB said: “The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period.”
The bank also warned of the trade-off it faces between containing price rises and preserving economic growth. “The outlook remains highly uncertain, with risks to the upside of inflation and to the downside of economic growth,” the ECB said.
The rate increase will make mortgages, consumer credit and borrowing by eurozone countries more expensive. That leaves households, businesses and governments facing higher financing costs while energy supplies remain tight ahead of winter.
The ECB raised its economic growth projection for 2026 to 0.9%, from 0.8% in June. Its latest forecasts put average inflation at 3.0% in 2026 and 2.5% in 2027.
The pace of the ECB’s action recalls 2022, when it had to take measures at a similar speed after Russia’s full-scale invasion of Ukraine. The current tightening cycle is tied instead to energy-price pressures arising from the Middle East conflict.
The ECB held its annual meeting in Berlin this year.
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