ECB raises interest rates for first time in three years - Reaction comes after Iran war spurs inflation
The European Central Bank has raised interest rates for the first time in almost three years. The deposit rate went from 2% to 2.25%, after a meeting of the governing council on Thursday.
The ECB sets monetary policy for the eurozone through three main interest rates: the deposit rate, which serves as the main benchmark for its policy. The ECB's deposit rate was last raised in September 2023, when it peaked at 4.0% after a tightening cycle aimed at stabilizing the inflation crisis following the pandemic. The ECB also raised its refinancing operations rate to 2.4% and its marginal lending rate to 2.65%.
The increase in key interest rates marks a clear reversal of the easing cycle that the ECB followed for most of 2025, after eurozone inflation reached 3.2% in May, the highest level since September 2023, driven by a 10.9% increase in energy prices.
Essentially, the governing council concluded that inaction was no longer justifiable.
The growth comes at a difficult time for the eurozone economy, which shrank by 0.2% in the first quarter of 2026, compared with the previous three months. Meanwhile, inflation rose to 3.2%, the highest level since 2023, and core inflation, which excludes volatile food and energy components, also rose from 2.2% in April to 2.5% in May, undermining any argument that price pressures remain limited to energy.
For households and businesses across the 21-nation bloc, the decision translates into higher borrowing costs for mortgages and corporate loans, at a time when purchasing power is already being squeezed by high fuel and gasoline prices. Markets are also pricing in a roughly 50% probability of a further hike in September, suggesting Thursday's move is seen as the opening of a new phase of tightening rather than a targeted, one-off intervention.
The European Central Bank raised its interest rates, marking a decisive turn toward austerity. The reaction comes after the war with Iran pushed eurozone inflation to its highest level in almost three years.
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