ECB Raises Rates Again as Energy-Driven Inflation Tops 3%

The European Central Bank raised interest rates for the second time this year on Thursday, lifting its benchmark deposit rate to 2.5% — the upper end of the range policymakers consider neutral for growth — in a move that had been widely anticipated.

The decision, taken at a meeting in Berlin as part of the ECB's practice of holding one policy gathering a year in a different euro zone city, responds to inflation that has climbed well above the bank's 2% target across the 21-country bloc. The surge is attributed entirely to higher energy costs stemming from the war on Iran, with oil and natural gas prices rising sharply.

"The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth," the ECB said in a statement.

Inflation averaged above 3% last month, and the ECB now projects it will average 3.0% this year and 2.5% in 2027. The bank also nudged up its 2026 growth forecast to 0.9% from 0.8% in June.

Several factors complicate the path ahead. The conflict involving the United States, Israel and Iran, which began in late February, shows no sign of a quick resolution, and natural gas storage levels are below historic norms as the winter heating season approaches. Economic growth has also held up better than feared, a resilience that could add to price pressures.

At the same time, high energy costs have yet to feed into the prices of other goods and services, easing concerns about rapid second-round effects. Underlying inflation, which excludes volatile food and fuel prices, slowed last month as services inflation moderated, and wage growth continues to decelerate. Bond yields have risen sharply, largely in line with U.S. Treasuries, tightening financing conditions and effectively doing some of the central bank's work.

Those mixed signals suggest that even if price pressures persist, they remain far weaker than in 2022, when inflation exceeded 10% after energy prices spiked following Russia's invasion of Ukraine. Financial investors are betting on further increases later this year and in 2027, but the ECB is expected to move cautiously on any follow-up. Attention now shifts to ECB President Christine Lagarde's press conference at 1245 GMT.