ECB Announces First Rate Hike Since 2023 Amidst US-Iran War Fueled Inflation
The European Central Bank (ECB) has made a decisive policy shift, raising its deposit facility rate by 25 basis points to 2.25% on Thursday, June 12. This marks the first interest rate hike since 2023. The ongoing US-Iran war continues to escalate energy costs, pushing the eurozone inflation well above the bank’s 2% target.
In May 2026, Eurozone inflation surged to 3.2% — the highest level since 2023. Concurrently, core inflation rose from 2.2% to 2.5%. The primary cause of this inflation is the near-closure of the Strait of Hormuz, which has significantly disrupted global oil shipments, resulting in a surge in energy prices.
Isabel Schnabel, a member of the ECB Executive Board, warned of the rising risk of de-anchoring inflation expectations and called for action, irrespective of any ongoing peace negotiations. Christine Lagarde, the ECB President, stated that the bank is “not pre-committing to a particular rate path,” but acknowledged the significant upside inflation risks.
Despite the eurozone economy contracting by 0.2% in Q1 2026, the rate hike has been implemented, raising concerns of stagflation — a detrimental combination of rising inflation and weak growth. The ECB has cut its full-year 2026 growth forecast to a mere 0.8%.
Economists at Deutsche Bank described the hike as “a significant moment,” noting it is the first by a major global central bank in direct response to the Iran-driven energy shock. A Bloomberg survey suggests economists expect a further hike in September 2026.
Source: CNBC – ECB hikes interest rates for first time since 2023