ECB Raises Interest Rates Again amid Oil Shock

On Thursday, the European Central Bank (ECB) raised its benchmark interest rate for the second time this year, from 2.25% to 2.50%. The increase came in response to rising inflation, driven by higher energy prices after a renewed escalation of hostilities between the United States and Iran.

Attacks on military targets, shipping and energy infrastructure pushed oil prices back above $100 per barrel. The ECB expects inflation to remain well above its 2% target for an extended period. It estimates inflation at 3% in 2026, 2.5% in 2027 and 2.1% the following year. However, these forecasts may not yet fully reflect the latest increases in energy prices, particularly for natural gas.

At the same time, the bank revised its eurozone economic growth outlook upward to 0.9% this year, 1.4% next year and 1.5% in 2028. The economy remains more resilient than expected, and bank lending picked up in July.

Financial markets are anticipating one more rate hike this year and another one or two next year. Economists, on the other hand, believe that Thursday's hike may be the last for now, although the risk that further monetary tightening will be needed is growing. The ECB has made its next steps contingent on incoming data.

(Reuters, bak)