The European Central Bank raised interest rates on Thursday, becoming the first major central bank to act to rein in rising inflation set off by the war in the Middle East.
European policymakers, who set rates for the 21 countries that use the euro, are moving more quickly than officials in other major economies, such as the United States and Britain, because the war has jolted inflation in the region from a relatively comfortable position. The E.C.B. lifted its key rate by a quarter point, to 2.25 percent. It was the central bank’s first increase since September 2023, having cut rates eight times in 2024 and 2025.
Before the war, inflation in the eurozone was close to the bank’s 2 percent target. By May, it had jumped to 3.2 percent. Now, officials warn it will be “well above” target into the first half of next year as higher energy prices also feed through into higher prices for food, other goods and services.
“We are beginning to see a broadening of inflation throughout the economy,” Christine Lagarde, the president of the central bank, said in a news conference on Thursday in Frankfurt.
Since the outset of the war in the Middle East, the closure of the Strait of Hormuz — a critical waterway for energy, fertilizers and other commodities off Iran’s southern coast — has pushed up inflation around the world. But those rising costs are weighing on economic growth, leaving central bankers to balance the risks of higher inflation against those of a slowdown.
Central banks in a few other countries, including South Africa, Australia and Norway, have raised rates since the war began in late February. The Bank of Japan is expected to raise rates next week for the first time since December.
In the United States, prices are rising at their fastest pace in three years, diminishing the prospects of a resumption of the rate-cutting cycle the Federal Reserve was in last year. Fed officials will meet next week, and though they are not expected to change rates then, there are growing bets among investors that rates will rise later in the year. Similarly, the Bank of England is expected to hold interest rates next week after the war in the Middle East interrupted a slow but steady series of rate cuts.
For the past year, the E.C.B. has held rates at 2 percent, a level intended to neither bolster nor restrict the economy. While Europe has been grappling with how to improve competitiveness and generate sustained growth, policymakers expected that keeping rates low would, in the short term, support the economy through more consumer spending and businesses investment.
Instead, the conflict in the Middle East quickly upended those expectations. Soaring energy prices added uncertainty and unpredictability. Economists, weighing a range of increasingly adverse scenarios, have started to predict sharply higher inflation, slower economic growth and even recession.
On Thursday, the E.C.B. published new economic forecasts, showing that inflation was likely to rise even more than its staff expected near the outset of the war. In their main scenario, price growth would average 3 percent this year, 2.3 percent next year and 2 percent in 2028. Staff also lowered their economic growth forecasts, projecting the region’s economy to grow just 0.8 percent this year because of “a more pronounced impact of the war on commodity markets, real incomes and confidence.”
Still, the eurozone economy has not shown signs of a repeat of 2022, when Russia invaded Ukraine. Europe responded by cutting itself off from Russian gas, a critical energy supply, and inflation climbed into the double digits. So far, traders aren’t betting that this is the beginning of a long and aggressive cycle of rate increases, though financial markets suggest there could be two more quarter-point rate increases by next spring.
Many economists argue that the E.C.B. is unlikely to raise rates that much because it has to weigh higher inflation against signs of any economic slowdown caused by the war. Consumer confidence has plummeted and could weigh further on spending, while businesses and governments are diverting money to pay the higher costs of energy.
To some extent, slower growth could mitigate inflationary pressures. If consumers grow more nervous about spending, companies may find it harder to raise prices. At the same time, workers may not be able to push for higher wages if the labor market weakens. That could stop inflation from rising as quickly or for as long.
In fact, the prospect of a deeper slowdown has made some economists concerned that rate increases could be a mistake. They have raised comparisons to 2011, when the E.C.B., led by Jean-Claude Trichet, raised rates twice in the first half of the year only to have Mario Draghi, Mr. Trichet’s successor, cut rates a few months later.
Frederik Ducrozet, head of strategy and macro research at Pictet Wealth Management, said he did not believe it was necessary for the E.C.B. to raise interest rates because he didn’t see any signs of so-called second round effects, in which higher energy costs lead to higher wages.
E.C.B. officials said that the decision to raise rates was “robust” in light of the range of scenarios they considered about how the war might affect the European economy in the next few years. One scenario was based on a swift resolution to the conflict and energy prices returning to their prewar levels this year.
Though, at this point in time, that more optimistic outcome was unlikely to materialize, Ms. Lagarde said.
