FRANKFURT, Germany — In a landmark policy shift triggered by the economic fallout of the ongoing Iran conflict, the European Central Bank (ECB) has become the first major global central bank to lift interest rates to counter surging inflation fueled by skyrocketing oil prices. The decision on Thursday puts the ECB ahead of next week’s highly anticipated rate-setting gatherings of the U.S. Federal Reserve, Bank of Japan and Bank of England, as central bankers worldwide grapple with the dual challenge of taming price growth and protecting fragile economic expansion.
The ECB’s 25-basis-point increase lifts its benchmark policy rate from 2% — a level held steady for 12 months — to 2.25%. The move comes in direct response to a sharp spike in global crude prices triggered by Iran’s disruption of crude flows through the Strait of Hormuz, the strategic waterway that normally carries roughly one-fifth of the world’s daily oil and fuel trade. The strait has remained closed to most commercial vessel traffic for 103 days as of the ECB’s announcement.
Global benchmark Brent crude traded around $93 per barrel on Thursday, a roughly 27% jump from the $73 per barrel recorded on the eve of the outbreak of the Iran war. The energy price shock has already pushed eurozone inflation to 3.2% in May, well above the ECB’s 2% medium-term target. Higher oil and fuel costs feed directly into price increases for gasoline, diesel, cooking gas, heating oil and a wide range of petroleum-derived products, driving up overall consumer prices. The rate hike is designed to cool consumer and business demand, easing upward pressure on prices as energy costs surge.
But the ECB’s policy move balances inflation concerns against a backdrop of lackluster eurozone economic growth, leading many market analysts to forecast the increase will be a one-off adjustment rather than the start of a prolonged tightening cycle. The step is widely interpreted as a proactive signal to financial markets that the central bank is committed to preventing inflation from spiraling out of control.
Speaking at a post-meeting press conference, ECB President Christine Lagarde emphasized that future policy decisions will remain contingent on evolving economic data, particularly the duration and magnitude of elevated energy prices. “We are well positioned to navigate the uncertainty caused by the war, and we will closely monitor the situation and follow a data-dependent and meeting-by-meeting approach,” Lagarde stated, adding that the bank is “not pre-committing to a particular rate path.” She also warned that inflation would likely climb further over the summer months and remain above the ECB’s target well into the first half of next year.
The ECB’s action follows smaller rate increases from central banks in Australia and the Philippines since the Iran conflict began, and market attention is now turning to upcoming policy decisions from the world’s largest central banks. For the U.S. Federal Reserve, led by newly appointed Chair Kevin Warsh — tapped for the role by President Donald Trump earlier this year — most economists expect policymakers to hold interest rates steady at next week’s meeting.
Warsh publicly advocated for rate cuts last year, and Trump repeatedly criticized Warsh’s predecessor Jerome Powell for refusing to implement deeper rate reductions. But amid a post-war inflation surge that has pushed U.S. inflation above 4% — a three-year high — Trump and his administration have shifted their stance, now favoring keeping borrowing costs unchanged. Market observers expect the Fed to remove language from its post-meeting statement that previously signaled the next policy move would be a rate cut, clearing the way for a potential rate increase before the end of 2025 if inflation does not cool. Multiple Fed officials have already warned that sustained above-target inflation could force a rate hike by year’s end.
Higher central bank benchmark rates ripple through the broader economy, pushing up borrowing costs for everything from home mortgages and corporate investment to government debt. By making credit more expensive, rate increases reduce overall demand for goods and services, which in turn eases upward pressure on prices.
Carsten Brzeski, global head of macro research at ING Bank, argued the ECB may only need one or two additional small hikes to keep inflation in check, as the current inflation surge may be less persistent than feared. Brzeski noted that consumers still grappling with the aftermath of post-pandemic inflation have little appetite to absorb further price increases, forcing businesses to absorb higher energy costs rather than pass them on to shoppers. “The pass-through of higher energy and input prices to final consumption will be limited due to a lack of ability and willingness of consumers to actually pay for these higher prices,” Brzeski explained in a emailed analysis.
This report was compiled with additional reporting from Rugaber in Washington.