ECB Raises Rates to Curb War-Driven Inflation

The European Central Bank (ECB) raised its main deposit rate to 2.25% on June 10th, marking its first interest rate hike since 2023. This move was widely anticipated as a response to rising inflation fueled by energy price surges triggered by the Iran war.

The ECB's decision comes amid complex geopolitical tensions and economic challenges. Inflation in the eurozone has exceeded the ECB's target of 2%, reaching 3.2% in May, up from 3% in April. The rate hike aims to curb these inflationary pressures and prevent broader economic impacts.

The decision was influenced by recent developments that have tempered expectations of an imminent end to the conflict, prompting the ECB to act proactively. In addition to raising rates, the ECB lowered its economic growth projections. Economic growth is now expected to average 0.8% in 2026, down from previous forecasts.

The euro was trading at $1.153 on June 10th, with two-year German bond yields flat at 2.71%. Germany's 10-year yield remained little changed at 3.057%. During a press conference following the policy meeting, ECB President Christine Lagarde provided additional insights into the bank's decision and economic outlook.

Lagarde emphasized the need for swift adoption of regulations establishing a digital euro. She noted that manufacturing has held up so far due to firms building up stocks to cope with supply chain pressures and higher defense spending. The labor market remains resilient, with unemployment at 6.3% in April, close to historical lows.

The first quarter saw additional jobs being created, although at a slower pace than in the last quarter of 2025. Lagarde highlighted that the war in the Middle East is weighing on economic activity, with surveys pointing to a slowdown, especially in services.

Slovak central bank chief and ECB policymaker Peter Kazimir stated that while the recent rate hike was a first step towards containing medium-term price pressures, more needs to be done. In an opinion piece, Kazimir warned against complacency and hesitation, noting that higher energy costs are likely to remain longer than anticipated. He emphasized that second-round effects of energy price rises would materialize without further ECB action.

Meanwhile, central banks in the US and UK are expected to keep interest rates on hold this week as a peace deal in the Middle East is expected to ease inflationary pressures. The US Federal Reserve is anticipated to maintain its benchmark interest rate at 3.5% to 3.75%, with investors closely watching for clues on future inflation paths from new Fed chair Kevin Warsh.

Inflation in the US has risen from 2.4% in February to a three-year high of 4.2% in May. The peace deal, which includes the reopening of the Strait of Hormuz, is expected to ease inflation over the rest of the year. In the UK, despite inflation running at 2.8%, above its 2% target, the Bank of England is likely to adopt a 'wait-and-see' approach before reacting to the deal's impact on oil prices.