ECB Lifts Benchmark Rate to 2.50% as Energy Costs Drive Inflation

The European Central Bank raised its benchmark interest rate by a quarter percentage point to 2.50% on Thursday, moving to contain inflation that is being stoked by elevated oil prices linked to the Iran war.

The decision, taken at a meeting in Berlin rather than the bank's Frankfurt headquarters, was underpinned by a stronger-than-expected economy that suggests businesses can absorb higher borrowing costs.

It follows a rate increase at the bank's June 11 meeting and a pause at its July 23 session. The central bank sets policy for the 21 European Union member countries that use the euro.

Eurozone inflation stood at 3.3% in August, above the bank's 2% target. Oil prices have climbed past $100 per barrel as tanker traffic through the Strait of Hormuz has fallen amid the threat of Iranian attacks. Policymakers face added uncertainty because it is unclear how long the shipping restrictions and high oil prices will persist.

Markets will look to remarks later on Thursday by ECB President Christine Lagarde for signals on whether further increases are ahead.

Inflation pressures are also shaping expectations around the U.S. Federal Reserve, whose rate-setters meet on Sept. 15-16. Fed Chair Kevin Warsh has said the bank may have "more work to do" to contain U.S. inflation of 3.7%.

Higher rates work to cool inflation by making borrowing more expensive for households and businesses, from home purchases to new factories. That dampens demand for goods and eases price pressures. The ECB's benchmarks first affect banks, and through them lending rates across the broader economy.