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ECB lifts rates to 2.5% and flags higher inflation risk

The ECB said the risk of elevated inflation over the next year has risen amid renewed Middle East fighting, with oil above $105 a barrel.

Reported · Written up by our desk · Central Banks

The European Central Bank raised its main interest rate to 2.5%, warning that the risk of higher inflation over the next year has increased following renewed fighting in the Middle East, according to The Guardian Business. The ECB also said higher borrowing costs were being driven by a jump in oil and gas prices tied to renewed US and Iran attacks on ships in the Strait of Hormuz.

The decision came with a hawkish tone that spooked investors, as reflected in soaring government bond yields in Europe. The UK government debt yield rose to a 19-year high on Thursday, while European borrowing costs surged alongside energy prices, with Brent crude moving above $105 a barrel and gas also jumping.

In its updated outlook, the ECB lifted its forecast for eurozone economic growth in 2026 to 0.9%, from 0.8% in June, and expects inflation to average 3% this year. The ECB expects headline inflation to return to around target towards the end of 2027, supported by the effect of higher interest rates.

The Guardian Business also reported that the ECB highlighted energy as the main driver of inflation, with oil and gas prices rising after increased attacks affecting shipping transiting the Gulf. British gas prices rose to above 205p per therm, the highest since December 2022, while Dutch wholesale gas prices passed €80 per megawatt hour.

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