The European Central Bank has increased its deposit rate by 0.25 percentage points to 2.25 percent, citing mounting inflationary pressures driven by energy price spikes linked to the ongoing war in the Middle East.
Monetary Policy Tightening
On Thursday, the European Central Bank decided to raise interest rates, reversing a period of stability that had seen rates remain unchanged over the previous six meetings. The deposit rate now stands at 2.25 percent.
Economic Headwinds and Stagflation Risks
The decision comes as the EU economy faces significant pressure, having contracted by 0.2 percent in the first quarter of 2026. Economists are increasingly concerned about the potential for stagflation, characterized by stagnant growth and rising prices. Eurozone inflation reached 3.2 percent in May, the highest level recorded since 2023.
Macroeconomic Forecasts
New projections show average inflation for the eurozone at 3 percent in 2026, 2.3 percent in 2027, and 2 percent in 2028. Economic growth forecasts have been downgraded to 0.8 percent for 2026, 1.2 percent for 2027, and 1.5 percent for 2028.
Market Reaction and Future Outlook
The ECB maintains a data-dependent approach and has not committed to a specific future path for interest rates. Following the announcement, the euro rose 0.16 percent against the dollar to 1.1695. The next meeting is scheduled for July 22-23.