The European Central Bank raised its key interest rate by a quarter point on Thursday, lifting the deposit facility rate to 2.25% and marking its first tightening cycle since 2023.
The decision signals a decisive pivot from the April pause, as policymakers prioritize anchoring inflation expectations over fragile growth prospects.
The ECB’s shift is directly tied to the escalating Iran conflict, which has reignited energy price pressures and pushed inflation trajectories above the central bank’s 2% target.
The move was fully anticipated by markets, which had priced in a near-100% probability of a hike.
The ECB’s shift is directly tied to the escalating Iran conflict, which has reignited energy price pressures and pushed inflation trajectories above the central bank’s 2% target.
Governing council members emphasized that the geopolitical shock to energy markets necessitates a return to restrictive policy to prevent a wage-price spiral.
While the hike addresses immediate inflation risks, it underscores the ECB’s difficult balancing act.