European Central Bank (ECB) President Christine Lagarde addresses the media after the ECB’s Governing Council meeting, at the ECB headquarters in Frankfurt, Germany, Sept. 11, 2025.
Kai Pfaffenbach | Reuters
The European Central Bank announced a quarter-point rate hike on Thursday, bringing its key interest rate to 2.25% as the Iran war continues to blow inflation off target.
Markets had been pricing in a near-100% chance of the ECB raising rates by at least 25 basis points ahead of its June Governing Council meeting, according to LSEG data.
The ECB’s Governing Council said the decision had been made in a bid to ward off inflationary pressures generated by the U.S.-Iran war.
“The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area,” it said in a statement announcing the decision.
The central bank also raised its inflation forecasts, saying it now expects headline inflation in the euro zone to average 3% in 2026 before cooling to 2.3% next year and 2% in 2028.
It said the outlook had been altered in response to expectations of higher energy prices, which are expected to feed into the cost of food, goods and services.
Economic growth forecasts, meanwhile, were revised downward for this year and next year. The ECB now expects growth in the euro zone to average at 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028.
Officials said the growth outlook had been trimmed to reflect “a more pronounced impact of the war on commodity markets, real incomes and confidence.”
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