The European Central Bank (ECB) has raised its deposit rate by 0.25 percentage points to 2.25 percent, in a decisive shift toward tightening monetary policy after a cycle of easing that has characterized the bank's approach throughout much of 2025. The move, the first hike in nearly three years, followed a meeting of the Board of Governors on Thursday to counter mounting inflationary pressures.

New interest levels

The hike package has affected other key interest rates, with the ECB raising the interest rate on key refinancing to 2.4 percent and raising the marginal lending facility to 2.65 percent. The data showed that the last increase in the price of depository facilities was recorded in September 2023, when it peaked at 4 percent to contain the inflation crisis that followed the global pandemic.

Military tensions and the war on Iran have pushed inflation rates in the euro zone to their highest level in nearly three years, with inflation in the bloc jumping to 3.2 percent in May, driven by a sharp 10.9 percent increase in energy, fuel and gas prices, making it impossible for the Board of Governors to remain a bystander.

Core inflation, which excludes volatile food and energy components, rose from 2.2 percent in April to 2.5 percent in May, reflecting higher costs spilling over into the rest of the bloc's core goods and services sectors, European financial data showed.

First quarter contraction

The eurozone economy contracted by 0.2 percent in the first quarter of 2026, prompting economic analysts to warn that the 21-nation bloc could enter a period of "stagflation" that combines weak growth, soaring inflation, declining consumer confidence, and the rising cost of borrowing and mortgages for households and businesses.

The European Central Bank's Survey of Forecasters put the full 2026 GDP growth at just 0.9 percent. Official estimates attributed this direct reduction and downward revision to the direct negative impact of the energy price shock caused by the ongoing conflict in Iran.

Isabelle Schnabel, a member of the ECB's executive board and in charge of market operations, laid the theoretical basis for this decision, arguing in a speech at a conference in Seoul that interest rates should be raised regardless of the outcome of the ongoing peace talks on Iran, warning of the risk of inflation falling apart and expecting it to reach 4 percent before the end of this year.

The bank's chief economist, Philip Lane, confirmed that economic conditions have deteriorated significantly compared to last March's forecast, noting that the June meeting carries an inevitable upward revision of inflation estimates, at a time when financial markets priced Thursday's move in advance, with a 50 percent probability of approving another hike next September.