ECB lifts borrowing costs amid energy shock

The European Central Bank (ECB) increased interest rates for the second time this year amid escalating Middle East conflicts and rising energy prices, hinting at potential further hikes. The bank, which governs 21 eurozone nations, raised its key rate by a quarter point to 2.5 percent, the highest level since March of the previous year.

This marked the ECB's second rate hike this year, following a June increase for the first time since 2023 in response to a surge in energy costs following the US-led war on Iran. ECB President Christine Lagarde, speaking at a press conference, said the unanimous decision by the bank's governing council was an "obvious" move.

Lagarde, in Berlin during the meeting, expressed concern that the Middle East conflict would continue to fuel inflation, which is expected to stay well above target for an extended period. She did not provide clear guidance on future rate hikes, citing uncertainty in the outlook. However, the ECB did boost its growth forecasts for the current year to 0.9 percent and for the following year to 1.4 percent, suggesting the eurozone economy has fared better than anticipated in the face of the Middle East war's energy shock.

Lagarde highlighted the "resilience" of the economy, adding that near-term economic prospects had improved.

The central bank also adjusted its inflation projections for 2027 and 2028, keeping this year's figure at three percent.