The European Central Bank has raised interest rates for the first time since 2023 in response to higher inflation caused by the war in Iran.
The ECB raised its main deposit rate from 2% to 2.25% and financial markets are pricing in two more rises by next spring.
Eurozone consumer price inflation rose to 3.2% in May 2026, up from 3% in April, sparking concerns that the conflict in the Middle East will force manufacturers and retailers to push through price increases into the summer and autumn to maintain profit levels.
The increase in rates will be widely seen as as attempt by the ECB to get a grip on inflation at an early stage after criticism that it delayed rate rises in 2022 amid Russia’s invasion of Ukraine.
The central bank has held interest rates level until now in the hope that a peace deal will be signed between Donald Trump and Iran, limiting the need for a rise in interest rates to counter inflationary pressures.
However, a deal has so far proved out of reach and oil prices have continued to remain above $90 a barrel, compared with about $70 before the war started.
In March, the ECB president, Christine Lagarde, indicated that a rise in the cost of borrowing would be necessary to limit the increase in inflation.