The European Central Bank just did something it hasn’t done since September 2023: it raised interest rates. The 25 basis point increase, bringing the deposit facility rate to 2.25%, marks a sharp U-turn from the steady diet of cuts that defined the ECB’s approach over the past couple of years.
Eurozone inflation hit 3.2% year-over-year in May 2026, the highest reading since September 2023. Markets had priced in this move with a probability between 90% and 97%.
What’s driving the reversal
Chief Economist Philip Lane pointed to the ongoing conflict in Iran as a primary catalyst. Energy price shocks tied to the geopolitical crisis have rippled through the eurozone economy, pushing costs higher across the board.
The ECB’s updated projections forecast average headline inflation of 3.0% for 2026, easing to 2.3% in 2027, and finally settling at 2.0% in 2028.
