The European Central Bank (ECB) on Thursday became the first major central bank to hike interest rates in response to the Iran war as policymakers wrestle with how to confront the inflation fed by sharply higher oil prices.
The ECB’s rate-setting council raised its benchmark rate to 2.25% from 2%, where it had been for a year. The move comes ahead of rate-setting meetings next week at the Federal Reserve (Fed), the Bank of Japan (BOJ), and the Bank of England (BoE).
Oil prices have risen sharply due to Iran choking off the flow of crude oil through the Strait of Hormuz, the sea passage for a fifth of the world’s oil and fuel products during normal times.
Raising rates aims to dampen the consumer price inflation fed by higher costs for products made from crude such as gasoline, diesel fuel, cooking gas and heating oil.
International benchmark Brent crude was trading just below $92 per barrel on Thursday, up from around $73 on the eve of the war. That has helped push inflation to 3.2% in May in the 21 countries that use the euro currency, above the ECB’s target of 2%.
