ECB raises eurozone interest rates by 25 basis points<\/p>\n
Newsflash: the European Central Bank has increased borrowing costs across the eurozone for the first time since September 2023.<\/p>\n
The ECB\u2019s governing council voted to increase interest rates by a quarter of one percentage point.<\/p>\n
Policymakers hiked borrowing costs after eurozone inflation rose to 3.2% last month, as the Middle East crisis pushed up energy costs.<\/p>\n
Announcing the decision, the ECB says:<\/p>\n
double quotation markThe war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.<\/p>\n
This increases the rate on the ECB\u2019s deposit facility, which banks can use to make overnight deposits with the Eurosystem, to 2.25% up from 2%.<\/p>\n
The interest rate on the ECB\u2019s main refinancing operations, which commercial banks use to borrow funds from the ECB, is going up to 2.4% from 2.15%.<\/p>\n
And the rate on the marginal lending facility, which offers overnight credit to banks, rises to 2.65% from 2.4%.<\/p>\n
Share<\/a><\/p>\n Key events<\/p>\n Q: The ECB\u2019s monetary policy statement no longer says that longer term inflation expectations remain well anchored. Has your view changed?<\/p>\n Christine Lagarde says short term inflation expectations have risen on, but longer term expectations look to be broadly anchored at the ECB\u2019s 2% target.<\/p>\n Share<\/a>Lagarde: This is a good decision<\/p>\n Earlier in the press conference, Christine Lagarde rejected suggestions that the ECB might make an \u201cinsurance\u201d interest rate hike.<\/p>\n That prompts a teasing question\u2026.<\/p>\n Q: If it\u2019s not an insurance hike, what is it then? Is it the start of a new hiking cycle or something else?<\/p>\n Lagarde tries to sweep this aside, calling today\u2019s rate rise \u201ca good monetary policy, interest rate decision\u201d.<\/p>\n She insists it is a \u201csensible monetary policy decision\u2026.that stands\u201d.<\/p>\n Share<\/a><\/p>\n Christine Lagarde then insists that the ECB has not been complacent in its handling of the eurozone economy.<\/p>\n \u201cI don\u2019t like to brag and I\u2019m not full of vanity,\u201d she insists, before pointing out that the ECB had kept inflation near its 2% target for the last 12 months (before the Iran war pushed up costs).<\/p>\n \u201cWe have not been complacent, we have done our job.\u201d<\/p>\n Share<\/a>Lagarde: A bank’s gotta do….<\/p>\n Q: Quite a few economists had warned that an interest rate rise today would be a mistake \u2013 what\u2019s your response?<\/p>\n Christine Lagarde replies that \u201ceverybody has to do what they have to do\u201d.<\/p>\n The ECB\u2019s job is price stability, she points out, and to follow its reaction function [how it adjusts monetary policy in response to evolving economic conditions].<\/p>\n She then cites the inflation outlook, and the risks to the upside on inflation, to defend today\u2019s interest rate hike.<\/p>\n Share<\/a><\/p>\n Updated at\u00a009.19 EDT<\/p>\n Lagarde: decision was unanimousEuropean Central Bank (ECB) President Christine Lagarde at today\u2019s press conference in Frankfurt, Germany Photograph: Heiko Becker\/Reuters<\/p>\n Onto questions!<\/p>\n Q: did the ECB\u2019s governing council consider holding interest rates today, or consider a larger increase in rates?<\/p>\n Lagarde (who appears to be sporting a starfish brooch) reveals that the decision to raise rates by a quarter-point was unanimous, and based on the latest forecast from ECB economists.<\/p>\n She says:<\/p>\n double quotation markThe decision that we took today to raise, by 25 basis points, our three interest rates was a unanimous decision without reservation.<\/p>\n We did not discuss or debate any other alternative proposal.<\/p>\n Share<\/a>Lagarde: The risks to the growth outlook are to the downside, due to Middle East war<\/p>\n European Central bank president Christine Lagarde then warns that the ongoing Iran war is threatening the eurozone\u2019s growth outlook.<\/p>\n \u201cThe risks to the growth outlook are to the downside, mainly owing to the war in the Middle East, which has added to the volatile global policy environment. Prolonged disruption of energy supplies could increase energy prices further and for longer than currently expected,\u201d Lagarde tells reporters in Frankfurt.<\/p>\n These factors would erode real incomes, and make firms and households more reluctant to invest and spend, she warns.<\/p>\n And the situation could worsen, she warns, if European companies are hit by shortages due to supply chain disruption.<\/p>\n Lagarde says:<\/p>\n double quotation markThe drag on growth would intensify if the closure of major shipping routes were to cause acute shortages of key inputs that forced euro area firms to curtail output.<\/p>\n A worsening of global financial market sentiment, or a tighter supply of credit, could company demand. Additional frictions in international trade could also further disrupt supply chain, reduce exports, and weaken consumption and investment.<\/p>\n Share<\/a><\/p>\n Updated at\u00a009.13 EDT<\/p>\n On the economic situation, Christine Lagarde argues that the euro area economy grew in the first quarter if you adjust for a temporary factor in Ireland.<\/p>\n That \u201ctemporary factor\u201d is that Ireland\u2019s GDP shrank by 12% (!) in the last quarter, due to a plunge in activity at its multinational companies.<\/p>\n That pulled the eurozone into an official contraction in the first three months of 2026, but yet the picture is better if you exclude Irish GDP (and GDP is not a good measure of Ireland\u2019s economy).<\/p>\n Share<\/a><\/p>\n Lagarde then insists that the ECB is \u201cnot pre committing to a particular rate path\u201d.<\/p>\n She says:<\/p>\n double quotation markIn particular, our interest rate decisions will be based on our assessment of inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission.<\/p>\n Share<\/a><\/p>\n Christine Lagarde then warns that the outlook for the eurozone remains uncertain, with upside risks for inflation and downside risks for economic growth.<\/p>\n She tells reporters in Frankfurt:<\/p>\n double quotation markThe full implication of the war for medium term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second round effects.<\/p>\n Share<\/a>Lagarde: The war in the Middle East is generating inflation pressures<\/p>\n ECB president Christine Lagarde is holding a press conference now to explain today\u2019s interest rate hike.<\/p>\n Lagarde begins by warning that the Iran war is creating inflation pressures in the euro area.<\/p>\n double quotation markThe Governing Council is committed to setting monetary policy to ensure that inflation stabilises at our 2% target in the medium term.<\/p>\n In line with this commitment, we today decided to raise the three key ECB interest rates by 25 basis points. The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios, mapping out how the shock might evolve and affect the medium term outlook for the euro area.<\/p>\n Lagarde then outlines how the ECB\u2019s economists have raised their inflation forecasts, and cut their prediction for growth (as covered earlier in this blog).<\/p>\n Share<\/a><\/p>\n Today\u2019s interest rate hike from the ECB won\u2019t be the last this year, predicts Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK:<\/p>\n double quotation mark\u201cAs expected, the ECB hiked rates by 25bps today. The next move will depend on how energy prices evolve over the summer, but the risks are clearly skewed to another rate hike later this year. However, a weaker labour market and soft economy will limit second-round effects and reduce the need for further tightening.<\/p>\n \u201cGiven inflation has already jumped to 3.2% in May and there is growing evidence of further inflation in the pipeline with PPI surging from -3.0% in February to 4.9% in April, today\u2019s rate hike was inevitable. In addition, the updated forecasts show the ECB expects core inflation to average 2.5% this year and next, up from 2.3% and 2.2% respectively.<\/p>\n Share<\/a><\/p>\n Today\u2019s rate hike makes the ECB the first G7 central bank to raise interest rates in response to the Iran war.<\/p>\n The US Federal Reserve, the Bank of England, and the Bank of Japan, all meet next week. The BoJ is expected to raise rates, while the BoE and the Fed probably won\u2019t\u2026.<\/p>\n Share<\/a>Eurozone growth forecasts lowered<\/p>\n Disappointingly, the ECB has lowered its forecast for growth in the euro area.<\/p>\n Its baseline forecasts now show economic growth at an average of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028.<\/p>\n The bank says:<\/p>\n double quotation markThis is a downward revision for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence.<\/p>\n In March, the ECB had expected growth to average 0.9% in 2026, 1.3% in 2027 and 1.4% in 2028.<\/p>\n Share<\/a>ECB raises inflation forecast<\/p>\n The ECB has also rised its forecasts for inflation, due to the knock-on impact of the Iran war on energy prices.<\/p>\n Headline inflation is now expected to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028.<\/p>\n Back in March, the ECB had forecast inflation would be 2.6% in 2026, 2.0% in 2027 and 2.1% in 2028.<\/p>\n The ECB explains:<\/p>\n double quotation markCompared with March, staff have revised up their baseline projection for inflation in 2026 and 2027 owing to a higher path for energy prices, which, to some extent, is expected to feed into food, goods and services inflation.<\/p>\n Share<\/a><\/p>\n Updated at\u00a008.22 EDT<\/p>\n ECB raises eurozone interest rates by 25 basis points<\/p>\n Newsflash: the European Central Bank has increased borrowing costs across the eurozone for the first time since September 2023.<\/p>\n The ECB\u2019s governing council voted to increase interest rates by a quarter of one percentage point.<\/p>\n Policymakers hiked borrowing costs after eurozone inflation rose to 3.2% last month, as the Middle East crisis pushed up energy costs.<\/p>\n Announcing the decision, the ECB says:<\/p>\n double quotation markThe war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.<\/p>\n This increases the rate on the ECB\u2019s deposit facility, which banks can use to make overnight deposits with the Eurosystem, to 2.25% up from 2%.<\/p>\n The interest rate on the ECB\u2019s main refinancing operations, which commercial banks use to borrow funds from the ECB, is going up to 2.4% from 2.15%.<\/p>\n And the rate on the marginal lending facility, which offers overnight credit to banks, rises to 2.65% from 2.4%.<\/p>\n Share<\/a>ECB expected to raise interest rates shortly<\/p>\n The eurozone is bracing for its first interest rate rise since 2023, as the European Central Bank prepares to set borrowing costs across the single currency region.<\/p>\n The ECB is expected to increase eurozone interest rates by a quarter of one percentage point today, to combat inflationary pressures from the Iran war.<\/p>\n Eurozone inflation rose to 3.2% last month, further above the ECB\u2019s target of 2%, putting pressure on policymakers to tighten policy \u2013 even though costs are being driven up by external factors beyond the EBC\u2019s control.<\/p>\n Kathleen Brooks, research director at XTB, explains:<\/p>\n double quotation markThe fear is that the ECB could make the same mistake as it did in 2011, when it hiked rates right before the sovereign debt crisis. Today\u2019s hike could exacerbate the growth issues in the currency bloc, and that could weigh on the ECB\u2019s credibility, something that [ECB president Christine] Lagarde and co will want to avoid.<\/p>\n There is a growing chorus that this rate hike won\u2019t bring down inflation, which is caused by an international energy supply crunch. Due to this, Lagarde may want to deliver as neutral a message as possible later today, and the bar is high for Lagarde to deliver a hawkish surprise.<\/p>\n The ECB\u2019s decision is due at 2.15pm in Frankfurt, or 1.15pm UK time, followed by a press conference 30 minutes later.<\/p>\n