FRANKFURT — The European Central Bank raised its benchmark deposit rate to 2.5 percent on Thursday, citing persistent energy-driven inflation that has climbed above 3 percent across the eurozone.
This marks the ECB's second rate increase in 2026. The move steepens borrowing costs for mortgages, consumer credit and other loans across the 21-country bloc.
Inflation has been driven primarily by higher oil and natural gas prices stemming from the U.S.-Iran conflict, which began in late February with no clear resolution. Gas storage levels remain below historical norms heading into the winter heating season, sustaining upward pressure on energy costs.
The ECB's statement following its annual meeting in Berlin acknowledged the constraints: "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 central bank said the "outlook remains highly uncertain, with risks to the upside of inflation and to the downside of economic growth."
The bank updated its 2026 growth forecast to 0.9 percent from 0.8 percent in June, while projecting inflation to average 3.0 percent for 2026 and 2.5 percent in 2027—both well above its 2 percent target.
Broadly, eurozone inflation remains concentrated in energy. Price pressures have not yet transmitted significantly into food, goods or services outside the energy sector, suggesting the shock remains supply-driven rather than demand-driven.
Sylvain Broyer, chief economist for Europe, the Middle East and Africa at S&P Global, said the inflation outlook has worsened over the summer. "Supply shocks are not only multiplying, but it is increasingly likely that demand is also contributing to inflation," Broyer said.
The ECB's pace of rate increases reflects concern about repeating the experience of 2022, when it moved too slowly in response to Russia's full-scale invasion of Ukraine and was forced into a rapid tightening cycle.
