ECB raises interest rates again amid Iran war inflation pressure

The European Central Bank (ECB) raised its key interest rates by 25 basis points on Thursday, responding to ongoing inflation pressures stemming from the conflict in the Middle East. The new rates, effective September 16, are 2.50% for the deposit facility rate, 2.65% for the main refinancing rate, and 2.90% for the marginal lending facility.

This is the second rate hike since the U.S.-Iran war commenced, following a 25-basis-point increase in June 2024. The ECB's Governing Council highlighted that inflation is expected to remain well above the target for an extended period. The bank's staff projections forecast euro zone headline inflation averaging 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028.

Core inflation, excluding energy and food, is expected to be 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028, with upward revisions for 2027 and 2028 compared to June projections. Despite the upward revisions in inflation forecasts, the ECB's medium-term target remains a 2% inflation rate. The bank also raised its economic growth outlook for the euro area, anticipating 0.9% growth in 2026 and 1.4% in 2027.

However, the Governing Council emphasized that risks remain, with inflation risks tilted to the upside and growth risks tilted to the downside. The ECB's decision was largely anticipated by markets, which had assigned a high certainty to the 25-basis-point increase. The conflict in the Middle East has placed the euro zone at risk of energy price pressures due to potential disruptions in oil shipments through the Strait of Hormuz, driving up global oil prices.

Sovereign borrowing costs across the region have surged, with Germany's 10-year Bund yield reaching a 2011 high of 3.451% as investors consider the persistent inflation and tightening outlook. The Governing Council did not indicate any future rate changes, stating that each decision would be assessed on its own merits based on new data. ECB President Christine Lagarde is set to address the media at 8:45 a.m. ET on Thursday.