European Central Bank raises interest rates as Middle East war fuels inflation fears

The European Central Bank has raised its three key interest rates by 25 basis points, citing growing inflation risks linked to the war in the Middle East and warning that the conflict could weigh on economic growth across the euro area.

Announcing the decision on Thursday, the ECB’s Governing Council said it remained focused on bringing inflation back to its 2 percent target over the medium term, even as geopolitical tensions create fresh uncertainty for policymakers.

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“The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium term outlook for the euro area,” the central bank said in its policy statement.

The move marks a significant response to mounting concerns that higher energy prices triggered by the conflict could spill over into wider parts of the economy, keeping inflation elevated for longer than previously expected.

According to the ECB’s latest staff projections, headline inflation is expected to average 3.0 percent in 2026 before easing to 2.3 percent in 2027 and reaching the bank’s target of 2.0 percent in 2028. Inflation excluding food and energy is projected at 2.5 percent in both 2026 and 2027, before falling to 2.2 percent in 2028.

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ECB officials said inflation forecasts for 2026 and 2027 had been revised upward, largely because of a steeper path for energy prices. They warned that rising energy costs could gradually feed into food prices, manufactured goods and services, creating broader inflationary pressures across the economy.

At the same time, the bank painted a more cautious picture of economic growth. The ECB now expects euro area growth to average 0.8 percent in 2026, 1.2 percent in 2027 and 1.5 percent in 2028.

The growth outlook for the next two years has been revised downward, reflecting what the central bank described as the increasingly visible impact of the conflict on commodity markets, household incomes and business confidence.

“The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth,” the ECB said.

Policymakers acknowledged that much will depend on how long the conflict lasts and how severely it disrupts global energy markets. The bank said the eventual impact on inflation and growth would be shaped not only by energy prices but also by wider economic effects that could emerge over time.

Despite the uncertainty, the ECB signalled that future decisions would remain driven by incoming data rather than a predetermined path for interest rates.

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“The Governing Council is not pre committing to a particular rate path,” the statement said, adding that future moves would depend on assessments of inflation, economic conditions and the strength of monetary policy transmission.

The rate increase underlines the difficult balancing act facing central banks as they confront the twin challenge of slowing growth and persistent inflation. For the ECB, containing price pressures has remained the priority, even as the economic costs of the Middle East conflict become increasingly apparent.