The European Central Bank raised its deposit facility rate by 25 basis points to 2.25% on Thursday, its first increase in nearly three years, as energy-driven inflation tied to the ongoing Iran conflict pushes the eurozone well above the bank's 2% target.

Key Highlights

  • First hike since 2023: The ECB raised the deposit facility rate by 25bp to 2.25%, ending a seven-meeting pause.
  • Inflation at 3.2%: Eurozone headline inflation reached 3.2% in May, the highest since 2023; core inflation rose to 2.5% from 2.2% in April.
  • Growth cut to 0.8%: The ECB revised its 2026 eurozone GDP forecast down to 0.8% following a 0.2% economic contraction in Q1 2026.
  • Inflation forecast raised: The bank now projects 2026 eurozone inflation at 3.0%, up from 2.6% in its March projections, with a return to target not expected until 2028.
  • Unanimous decision: ECB President Christine Lagarde described the move as "unanimous without reservations," with risks to inflation remaining to the upside.

The European Central Bank raised its three key interest rates by 25 basis points on Thursday, lifting the deposit facility rate from 2.00% to 2.25% in the bank's first increase since September 2023. The decision came as the inflationary consequences of the Iran war continued to broaden across the eurozone economy.

The Governing Council cited rising energy prices stemming from the Iran conflict and disruption to Strait of Hormuz shipping as the primary drivers of its decision. Core inflation, which strips out food and energy, rose to 2.5% in May from 2.2% in April, reinforcing the view that price pressures are no longer confined to energy. Headline inflation reached 3.2%, the highest since 2023.

In updated quarterly projections, the ECB raised its 2026 inflation forecast to 3.0% from 2.6%, with a return to the 2% target projected only in 2028. The bank simultaneously cut its 2026 GDP forecast to 0.8%, citing a more marked impact from the war on commodity markets, real incomes, and confidence. The eurozone economy contracted 0.2% in Q1 2026, prompting warnings of stagflation.

ECB President Lagarde described the decision as "unanimous without reservations" and stated that the Iran war was generating inflation pressures that made the move "robust across a range of scenarios." She said risks to the growth outlook were to the downside while inflation risks remained to the upside, and stressed that the Governing Council had not pre-committed to any future rate path.

The ECB becomes the first major central bank globally to respond to the Iran war's inflationary fallout. Financial markets had fully priced in the June move, with money markets now pricing a total of approximately 40 basis points of increases for 2026, down sharply from expectations of over 75 basis points seen earlier this year. The next ECB monetary policy meeting is scheduled for July 23, 2026.

The euro held near $1.1525 following the announcement.