The European Central Bank is preparing to raise its key interest rate this week to combat a new wave of energy-driven inflation. Most economists expect the central bank to announce a 0.25 percentage point increase on Thursday, bringing the deposit rate to 2.25%. The pending policy decision would mark the central bank's first rate increase since 2022, when the region dealt with an energy price shock stemming from Russia's invasion of Ukraine.
Policymakers are reacting to a jump in global oil costs after the outbreak of war in Iran. With Brent crude futures trading about 40% above pre-war levels, overall inflation across the 21 countries that use the euro reached 3.2% in May. That inflation rate sits well above the central bank's stated 2% target. Core inflation, which removes volatile food and energy prices, also rose faster than expected to 2.5% last month.
Growth concerns
The pending decision makes the European Central Bank the first among its peers to tighten monetary policy in response to the Middle East conflict. Recent purchasing manager surveys and official data show the regional economy is already slowing. Economists recently downgraded their 2026 economic growth forecast for the broader euro area to 0.7%, the weakest outlook since 2023.
Some economists warn that raising borrowing costs now risks repeating a policy error from 2011, when the central bank hiked rates into a wobbling economy. Ahead of the June 11 policy meeting, the current market outlook includes:
- A likely second interest rate increase arriving in September.
- Immediate higher monthly repayments for consumers, adding roughly €37 per month to a standard €300,000 tracker mortgage.
- Gradual upward pressure on new fixed-term home loans and broader borrowing costs as financial institutions adjust to the changing environment.
