Istanbul: The European Central Bank (ECB) on Thursday raised its three key interest rates by 25 basis points, marking its first rate hike since September 2023, as the war in the Middle East fuels renewed inflation pressures through higher energy prices. The bank increased the deposit facility rate to 2.25%, the main refinancing operations rate to 2.40%, and the marginal lending facility rate to 2.65%, with effect from June 17.

According to Anadolu Agency, the decision came after the ECB kept its key rate at 2% in its previous seven consecutive meetings. 'The war in the Middle East is generating inflation pressures,' the bank said in its policy statement, adding that the decision to raise rates was 'robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.' The ECB said it remains committed to setting monetary policy to ensure that inflation stabilizes at its 2% target in the medium term.

In the baseline of the new Eurosystem staff projections, headline inflation is expected to average 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Inflation excluding energy and food is projected to average 2.5% in both 2026 and 2027, before easing to 2.2% in 2028. Compared with March, staff revised up their inflation projections for 2026 and 2027 due to a higher expected path for energy prices, which is also expected to feed into food, goods, and services inflation.

Eurozone consumer price inflation reached 3.2% in May 2026, up from 3% in April and matching market expectations, according to preliminary data. This marked the highest inflation rate since September 2023 and remained significantly above the ECB's 2% target. Energy costs surged 10.9%, the steepest increase since February 2023, fueled by supply constraints linked to the Middle East conflict.

The ECB also lowered its growth projections for 2026 and 2027, citing the more pronounced impact of the war on commodity markets, real incomes, and confidence. The baseline now sees euro area economic growth averaging 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. 'The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth,' the ECB said. The bank said the full implications of the war for medium-term inflation and growth would depend on the intensity and duration of the energy price shock, as well as the scale of indirect and second-round effects.