The European Central Bank is set to raise its key rate Thursday for the first time in almost three years, becoming the first major central bank to tighten policy in response to the energy price jump caused by the war in Iran. In a Reuters poll, 74 of 80 economists expected a 25-basis-point increase that would lift the deposit rate to 2.25%, with more than 60% expecting one further rise this year, likely in September.
The bank is acting because inflation across the 21 euro-zone countries reached 3.2% in May, well above its 2% target, and core inflation rose faster than expected to 2.5%. Brent crude futures sit about 40% above pre-war levels, and economists now see inflation averaging 3.3% per quarter for the rest of the year. Two-thirds of those polled said the risk of stagflation, weak growth alongside high prices, was high.
What households feel
The change reaches consumers fast. ECB President Christine Lagarde is expected to add €37 a month to repayments on a €300,000 mortgage over 25 years, hitting Ireland's 110,000 tracker mortgage customers immediately and pushing up new fixed-rate loans over time. Energy costs are already biting: home heating oil for 500 litres jumped from €500 to €900 in early April before easing to just below €700, and electricity and gas suppliers have raised prices.
Some economists warn the ECB risks repeating a 2011 policy error by tightening into a wobbling economy, with the euro zone now seen expanding just 0.7% in 2026, a third straight downgrade. UBS economist Dean Turner called any move a "risk management exercise" rather than a bid to slow growth.
After a renewed exchange of strikes between Iran and Israel, Brent crude rose nearly 5% to $97.60, and Asian and European stocks fell as investors priced in higher rates. The ECB's decision lands June 11.
