The European Central Bank just raised interest rates for the first time since 2023. Now it’s already signaling it might do it again.
On June 11, the ECB bumped its deposit facility rate by 25 basis points to 2.25%, a direct response to inflationary pressures fueled by the ongoing Iran conflict. Euro-area inflation hit 3.2% in May 2026, the highest reading in over two and a half years. And with markets pricing in roughly 70 basis points of additional tightening by year-end, the message from Frankfurt is clear: the era of rate cuts is over, at least for now.
What’s driving the reversal
For most of the past two years, the ECB had been easing monetary policy. That playbook got shredded when coordinated US and Israeli military operations against Iran began in late February 2026.
The conflict escalated into missile exchanges and a near-total blockade of the Strait of Hormuz, disrupting roughly 20% of global oil supply. Energy prices spiked, and inflation followed. The supply shock rippled through European energy markets, pushing consumer prices well above the ECB’s comfort zone. The central bank updated its inflation projections accordingly, now forecasting 3.0% for the full year of 2026, with a gradual decline to 2.3% in 2027 and a return to the 2.0% target by 2028.
