Faced with soaring energy prices fueled by war in the Middle East, the European Central Bank raised rates on Thursday, warning that the outlook remained uncertain, maintaining the possibility of further tightening.
The main key rate, on deposits, was raised by a quarter of a point, to 2.5%, its highest level since March 2025, following a monetary policy meeting relocated to Berlin. This is the second increase this year. “The outlook remains highly uncertain and carries upward risks for inflation and downward risks for economic growth,” explains the press release summarizing the day’s decisions. A message which suggests that the ECB does not rule out a further turn of the screw in the coming months.
Core inflation slows
After an increase in June then a pause in July, the ECB is faced with a resurgence of inflation linked to the surge in oil prices caused by the hostilities between Washington and Tehran and the conflict between the Houthi rebels of Yemen and Saudi Arabia.
Brent crossed $100 a barrel on Wednesday for the first time since the end of July, against a backdrop of persistent threats to energy flows passing through the straits of Bab el-Mandeb and Hormuz. In a euro zone heavily dependent on energy imports, inflation reached 3.3% in August, the highest level in three years, well above the 2% target set by the ECB. Core inflation, which excludes the prices of the most volatile goods (including energy and food), however slowed slightly to 2.4% year-on-year.
However, the ECB fears that the current energy shock will end up spreading to the entire economy through so-called second-round effects, if employees demand salary increases to compensate for the loss of purchasing power and companies pass on their higher costs in their prices.
By raising its rates, it increases the cost of real estate credit, business loans and the cost of public financing. The aim is to gradually curb demand and limit the ability of companies to increase their prices.
Growth forecasts raised
For 2026, the Frankfurt institution maintained its inflation forecast at 3.0%, as in June, and raised it to 2.5% in 2027, compared to 2.3% previously.
It slightly improved its growth forecast to 0.9% this year, compared to 0.8% previously, while Germany, Europe’s largest economy, did better than expected in the first half. GDP would then increase by 1.4% in 2027, then by 1.5% in 2028.
This reinforces the idea that a further increase in interest rates will not excessively compromise economic activity. Thus, “the Governing Council remains open to further monetary tightening, the probability of which now appears significantly increased, even in the event of a lull in energy prices compared to the levels observed this week,” commented Kamil Kovar, at Moody’s Analytics.
