“The war in the Middle East is generating inflation pressures,” said Christine Lagarde, president of the European Central Bank, announcing a 25-basis-point increase in all three key ECB interest rates on 11 June 2026. Photo: ECB

“The war in the Middle East is generating inflation pressures,” said Christine Lagarde, president of the European Central Bank, announcing a 25-basis-point increase in all three key ECB interest rates on 11 June 2026. Photo: ECB

The European Central Bank has raised rates by 25 basis points to contain renewed inflation pressures from the war in the Middle East, despite downgrading its growth outlook.

The European Central Bank raised all three key interest rates by 25 basis points, as ECB president Christine Lagarde warned that the war in the Middle East was generating new inflation pressures across the euro area.

The decision lifts 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 17 June 2026.

The increase comes as the ECB’s new Eurosystem staff projections show headline inflation averaging 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028. Inflation excluding energy and food is expected to average 2.5% in both 2026 and 2027 before easing to 2.2% in 2028.

Energy shock lifts inflation path

The ECB stated that staff had revised up their baseline inflation projections for 2026 and 2027 compared with March, owing to a higher path for energy prices. The central bank added that this is expected, to some extent, to feed into food, goods and services inflation.

The move signals that Lagarde is seeking to prevent a geopolitical energy shock from becoming embedded in broader price-setting behaviour and inflation expectations. The rate rise comes despite a weaker economic outlook. The ECB now expects euro area growth to average 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028.

Lagarde stated that the growth forecasts for 2026 and 2027 were revised down compared with March, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence.

No fixed rate path

Lagarde left future decisions open, saying that the Governing Council would follow a data-dependent and meeting-by-meeting approach. She reiterated that the council is not pre-committing to a particular rate path.

The ECB also confirmed that its APP and PEPP portfolios are declining at a measured and predictable pace, as the Eurosystem no longer reinvests principal payments from maturing securities.

For Luxembourg borrowers, the decision points to higher financing costs, particularly for households and companies exposed to variable rates. Banks may benefit from higher policy rates through stronger margins, but loan demand could weaken if mortgage and corporate borrowing costs rise further.

Lagarde added that the Transmission Protection Instrument remains available to counter unwarranted and disorderly market dynamics that threaten monetary policy transmission across the euro area.

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