The European Central Bank raised its three key interest rates by 25 basis points, marking its first rate hike since 2023. Under the latest policy decision, the changes will take effect on June 17, 2026. The deposit facility rate will rise to 2.25%, the main refinancing operations rate to 2.40%, and the marginal lending facility rate to 2.65%. The move came after renewed inflation pressure tied to a sharp jump in energy prices linked to conflict in the Middle East.
Energy shock pushes inflation back above target
Inflation data moved well away from the ECB’s target. Euro area May HICP rose 3.2% year over year, up from 3.0% in April and still above the central bank’s 2% target. Core inflation, which excludes energy and food, also increased from 2.2% to 2.5%. That rise suggested price pressure was spreading beyond energy, with second-round effects beginning to show through wages and services.
Higher inflation forecasts, weaker growth outlook
In its updated projections, the ECB lifted its inflation forecasts for 2026 and 2027 to 3.0% and 2.3% under the baseline scenario. At the same time, it cut its 2026 growth forecast to 0.8%, reflecting the hit from war-related disruption to commodity markets, real incomes, and business confidence. After several rate cuts in 2025, the ECB had left rates unchanged in April this year, but the latest geopolitical shock forced a change in direction.
Lagarde sticks to meeting-by-meeting approach
ECB President Christine Lagarde said future decisions would remain guided by a data-dependent and meeting-by-meeting framework, with no pre-commitment on the rate path. The report said markets had almost fully priced in the hike before the meeting. The ECB also repeated that it stood ready to adjust all of its tools, including the Transmission Protection Instrument, to address upside inflation risks and downside growth risks. Higher borrowing costs now add another layer of pressure for euro area households and businesses.