ECB raises rates to combat inflation amid Middle East conflict

The European Central Bank has tightened monetary policy, raising its key deposit rate by a quarter percentage point to 2.25%. This marks the first rate hike since July 2025, signaling the bank's resolve to tackle inflation that has climbed to 3.2% in the Eurozone, significantly above the 2% target.

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This is clearly a signal and is necessary in the face of uncertainty and inflation prospects.

The primary driver behind the inflation surge is the escalating energy prices, exacerbated by the conflict between the United States and Israel against Iran and the closure of the Strait of Hormuz. This decision, though anticipated by many economists, was deemed potentially risky by some due to a slowing growth environment and the absence of widespread price diffusion.

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It's not as if we are in an environment where growth is absent or seriously threatened.

However, ECB President Christine Lagarde defended the move, emphasizing its necessity amidst uncertainty and inflation outlooks. She stated the 25-basis-point increase, decided unanimously, sends a clear signal. The ECB also revised its inflation projections upward for 2026 and 2027, while maintaining a slightly more optimistic growth forecast for the Eurozone than the IMF.

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Markets, so far, are reacting calmly, but that does not mean we should underestimate the risks we face in any way.

Lagarde acknowledged the calm reaction of financial markets but cautioned against underestimating the risks. She asserted that the "main risk would have been not to take this type of decision," aiming to avoid past mistakes of reacting too late to inflation, as seen in 2022. The bank's proactive stance seeks to prevent inflation from spiraling out of control, a situation that becomes far more difficult to rectify.

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The main risk would have been not to take this type of decision.