By Thomas Moller-Nielsen
Key Takeaways:
- The ECB raised its key rate 25 basis points to 2.5% after euro-area inflation hit 3.3% in August (from 2.9% in July), a three-year high and above the 2% target. Lagarde called the unanimous hike a “no-brainer.”
- Officials blamed the Middle East war and Hormuz disruption for keeping inflation high for longer. They lifted the 2027 inflation forecast to 2.5% (2026 stayed at 3%) and nudged growth up to 0.9% this year and 1.4% next.
- Lagarde gave no rate path and said the next move depends on data. German 10-year yields touched 3.44%. Markets had priced about 75 more basis points of hikes by mid-2027; Deutsche Bank said December is possible but growth risk from gas prices remains.
(EurActiv) — The European Central Bank raised its key interest rate to 2.5% on Thursday, aiming to stem the surge in prices triggered by the war in Iran.
The 25 basis point (0.25 percentage point) hike, which was widely anticipated by analysts and investors, came after inflation in the 21-country euro area jumped to 3.3% in August 2026, up from 2.9% in July – the highest level in three years and well above the ECB’s 2% target rate.
“The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period,” the ECB said in a statement, adding that its decision underscores its commitment to ensuring that inflation stabilises at 2% in the medium term.
Speaking to reporters later on Thursday, Christine Lagarde, ECB president, described the decision to hike rates as a “no-brainer”, and that it was unanimously endorsed by the Governing Council.
She also refused to provide forward guidance on the ECB’s rate path.
The high current level of geopolitical uncertainty means “we simply cannot anticipate what exactly will be the next move”, Lagarde said. “We are focusing on what the data delivered today, and we are ready to demonstrate the appropriate agility in whichever direction it is needed.”
The US-Israeli war on Iran and Tehran’s closure of the Strait of Hormuz, a critical energy chokepoint, has triggered a global spike in inflation and led the ECB to increase rates in June for the first time since 2023. Uncertainty about the war’s length and overall impact on prices caused the ECB’s rate-setting Governing Council to hold rates steady in July.
Inflation was at 1.9% when the war began in late February, but has remained above the ECB’s 2% target ever since. Core inflation, which strips out volatile food and energy prices, has remained broadly steady, with August’s 2.4% core inflation rate being the same as in February.
Inflation fears have also driven global bond yields higher in recent weeks. The German 10-year bond, the eurozone benchmark, reached 3.44% on Thursday, the highest level since 2011.
In a nod to these inflationary concerns, the ECB also lifted its inflation projection for the euro area for 2027 from 2.3% to 2.5%, although its outlook for 2026 remained unchanged at 3%. It also upwardly revised its growth projections for this year from 0.8% to 0.9%, and for next year from 1.2% to 1.4%, citing the “greater than expected resilience” of the eurozone economy.
The euro weakened slightly against the US dollar following the announcement, from $1.1616 to $1.614. Yields on rate-sensitive 2-year German bonds rose from 3.06% to 3.07%.
Prior to Thursday’s decision, markets were pricing in 75 basis points (0.75 percentage points) of rate hikes by June 2027.
In its statement, the Bank also reiterated its commitment to pursuing “a meeting-by-meeting approach” and that it is “not pre-committing to a particular rate path”.
Responding to the announcement, Mark Wall, Deutsche Bank’s chief European economist, said: “Inflation risks may be rising, and a further hike in December may be more likely than not, but the ECB still needs to tread carefully.”
Rising gas prices will “eventually hurt growth”, he added. “The question is how much and when.”
