ECB Tightens

ECB’s First Hike Since 2023

The European Central Bank has raised interest rates by 25 basis points, taking its deposit rate to 2.25%. It's the first major central bank to tighten policy in response to the Iran war. It’s also the first time the ECB has increased its benchmark rate since 2023.

ECB President Christine Lagarde said the decision was unanimous and “without reservation.” Investors follow the central bank’s unity closely, as internal splits may signal uncertainty on the policy direction. This time, the message was crystal-clear: the ECB is willing to step up decisively to curb inflation.

The central bank lifted its average inflation forecast for 2026 to 3%, expecting Eurozone growth to slow down to 0.8%.

Beyond the Oil Shock

The Strait of Hormuz between Iran and Oman is one of the world’s key energy chokepoints, with around 20% of the world’s oil and liquefied natural gas normally flowing through this narrow passage. It has been largely shut since the start of the war in late February.

Disruption there also hits fertilizers, chemicals needed in mining and plastics, and helium — a key element in chip manufacturing. Shipping and insurance costs have shot up, too.

This is why the ECB is warning of a broad-scale inflation, pushing up food, goods, and services, not just fuel.

The Hint Before The Hike

ECB officials spent weeks preparing markets for this move. More than 90% of economists in a Reuters poll expected a June hike, and ECB board member Isabel Schnabel said in May that “looking through” the shock was no longer a good option.

That’s central bank forward guidance in action: officials signal their thinking ahead of time so markets are not blindsided. The ECB still says policy is decided meeting by meeting, but the messaging was so strong that investors had already priced this in.

Meanwhile, in the US, new Fed chair Kevin Warsh has said he does not believe in forward guidance and wants to scale it back.

Haunted by Pandemic Mistakes

Part of today’s hike is about the ECB’s own recent history. In the post-pandemic inflation surge a few years ago, central banks were widely criticized for reacting too slowly. Lagarde was leading the ECB already back then.

The supply chain disruption proved long-lasting, and the 2022 energy shock, following Russia’s invasion of Ukraine, sent prices racing.

This is why some economists see the ECB’s latest move as an “insurance hike” designed to protect the central bank’s credibility after that earlier misread. Critics say this risks repeating a different mistake by undercutting fragile growth with a hasty rate increase.

Which Banks Could Follow?

The ECB may not stay alone for long, but some of the other major central banks look less eager.

• The Bank of Japan is the standout: a June Reuters poll found 94% of economists expect it to raise rates this month to 1.0%, with more hikes later this year.
• The US Fed is expected to hold steady for now, though markets have started pricing some chance of a hike later in 2026.
• The Bank of England looks more likely to wait, with Governor Andrew Bailey saying “temporary above-target inflation” can be tolerated during the war