ECB Raises Interest Rates for Second Time Amid Middle East Conflict

The Governing Council of the European Central Bank decided on Thursday to raise the deposit rate from 2.25% to 2.5%, marking the second such increase since June 11, when the bank tightened monetary policy for the first time in three years. The ECB's other two key rates were also raised: the main refinancing operations rate rose to 2.65%, while the marginal lending rate climbed to 2.9%.

In its statement, the bank noted that the Middle East conflict continues to generate inflationary pressure and that inflation is likely to remain significantly above target for some time. Still, the Council expressed confidence that Thursday's decision leaves it well positioned to handle the uncertainty caused by the conflict.

ECB staff projections still point to average annual inflation of 3% this year, while estimates for 2027 and 2028 were revised upward to 2.5% and 2.1%, respectively. The decision follows August inflation data showing a rise to 3.3%, up from 2.9% in July — the highest reading since September 2023.

Energy prices drive the increase

The main driver was energy prices: inflation in this category jumped from 10.3% to 14.3% in August, as fighting near the Strait of Hormuz continues to constrain oil supply. The problem persists — on Wednesday, Brent crude again rose above $100 a barrel following renewed military clashes between the US and Iran.

The rest of the economy presents a calmer picture. Core inflation, which excludes energy, food, alcohol and tobacco, actually fell from 2.5% to 2.4% in August, while services inflation dropped from 3.3% to 3%. ECB researchers found that roughly 90% of the rise in energy inflation between January and May was driven by supply-side factors rather than demand, distinguishing the current episode from the 2021–2022 surge.

Average eurozone inflation masks wide differences between countries — in August it stood at 4.5% in Spain, 2.9% in Germany and 2.7% in France. The eurozone economy overall is holding up better than expected, but the ECB does not view this as overheating, and the current rate still falls within what it considers a neutral range. ECB President Christine Lagarde signaled in July that decisions would remain data-dependent, adding that the full inflationary impact of the energy shock had yet to materialize. Notably, the latest projections do not account for the most recent oil price spike or the rise in eurozone government bond yields to 15-year highs.