The European Central Bank (ECB) raised its benchmark interest rate on Thursday by 25 basis points, bringing the key benchmark rate to 2.5%, its highest level since March 2025. The move was widely expected and the euro has posted slight losses following the decision.
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ECB: Inflation will Remain Elevated due to Iran War
The ECB last raised rates in June, the first rate hike since 2023, in response to the US-Iran war, which sent oil prices skyrocketing and pushed inflation higher. This scenario was repeated today, as renewed fighting in the Persian Gulf has pushed oil prices above $100 a barrel. The ECB has now raised rates for the second time in three months.
The ECB statement contained a direct reference to the war, stating that, “the conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period.” The Bank is projecting that headline inflation, which includes energy costs, will average 3% in 2026.
In August, eurozone inflation hit 3.3%, with the energy component running at 14.3%. The ECB’s 2% inflation target isn’t looking very realistic at present, and with the eurozone heavily dependent on imported oil from the Gulf, energy prices and inflation aren’t about to fall anytime soon, barring a surprise end to the Gulf conflict. The positive news for the eurozone economy is that core inflation, which excludes energy costs, actually fell in August, dropping to 2.4% from 2.5% a month earlier.
At today’s meeting, the Governing Council did not hint at any further rate moves, saying that each rate decision would be determined based on the new data. In other words, the markets shouldn’t expect the central bank to provide any forward guidance ahead of upcoming rate meetings. If the Iran war continues and inflation continues to move upwards, there is a strong likelihood that the ECB will be forced to raise rates again, perhaps before the end of the year.
Euro, European Stock Markets Modestly Lower After ECB Decision
The euro hasn’t been able to translate the rate hike announcement into gains. In the North American session, EUR/USD currency pair is down 0.26% today, trading at 1.1602.
Key European stock indices are showing slightly lower numbers today.
The German DAX 40 Index is down 105.17 points, or 0.41%, at 25,449.11.
The French CAC 40 Index has declined by 13.92 points, or 0.17%, at 8142.74.
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