Rates raised by 25bp amid Middle East war pressures
The European Central Bank's Governing Council raised its three key interest rates by 25 basis points. The decision responds to inflation pressures intensified by the war in the Middle East.
Projections signal persistent inflation
The 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.
For inflation excluding energy and food, the baseline foresees averages of 2.5 percent in both 2026 and 2027, and 2.2 percent in 2028.
These figures represent an upward revision for 2026 and 2027 compared to March, primarily due to a higher expected path for energy prices, which are anticipated to impact food, goods, and services inflation.
Economic growth projections have been revised downwards for 2026 and 2027, now averaging 0.8 percent, 1.2 percent, and 1.5 percent for 2026, 2027, and 2028 respectively.
This reflects the more significant impact of the Middle East war on commodity markets, real incomes, and overall confidence.
War's shadow on outlook
The Governing Council emphasized that the outlook remains highly uncertain, with upside risks for inflation and downside risks for economic growth.
The full implications of the Middle East war on medium-term inflation and growth depend on the intensity and duration of the energy price shock, as well as its indirect and second-round effects.
The ECB will closely monitor the situation, adopting a data-dependent and meeting-by-meeting approach to monetary policy.
The Council explicitly stated it is not pre-committing to any particular rate path.
The APP and PEPP portfolios continue their measured decline, with reinvestments no longer occurring.
Source: Monetary policy decisions
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