Key rates raised by 25 basis points
The European Central Bank has raised its three key interest rates by 25 basis points. The Governing Council cited inflation pressures from the war in the Middle East and revised up its inflation projections.
War fuels inflation, prompts rate hike
The Governing Council decided to raise the three key ECB interest rates by 25 basis points, citing inflation pressures stemming from the war in the Middle East.
This decision is robust across various scenarios for how the shock might evolve.
New Eurosystem staff projections now forecast headline inflation to average 3.0 percent in 2026, 2.3 percent in 2027, and 2.0 percent in 2028.
Inflation excluding energy and food is projected at 2.5 percent for 2026 and 2027, and 2.2 percent for 2028.
These inflation forecasts for 2026 and 2027 are revised upwards from March, primarily due to a higher path for energy prices.
Economic growth projections have been revised downwards for 2026 and 2027, now standing at 0.8 percent and 1.2 percent respectively, reflecting the war's impact on commodity markets, real incomes, and confidence.
Uncertain outlook, data-dependent path
The outlook remains highly uncertain, with upside risks for inflation and downside risks for economic growth.
The full implications of the war for medium-term inflation and growth depend on the intensity and duration of the energy price shock and its indirect effects.
The Governing Council will closely monitor the situation, following a data-dependent and meeting-by-meeting approach to monetary policy.
Decisions will be based on the inflation outlook, incoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission.
The ECB is not pre-committing to a particular rate path.
Navigating a complex geopolitical landscape
This rate hike reflects the ECB's difficult balancing act between persistent inflation and a fragile growth outlook, heavily influenced by geopolitical tensions.
The decision underscores a clear prioritization of price stability, even as economic activity faces significant headwinds from the ongoing war in the Middle East.
While the data-dependent approach offers necessary flexibility, it provides limited forward guidance, leaving markets to interpret each incoming data point with heightened scrutiny.