ECB lifts borrowing costs amid energy shock, opens door for more hikes

The central bank has faced criticism in some quarters for trying to address an energy supply shock through tighter monetary policy.(AFP) — The European Central Bank raised interest rates Thursday for the second time this year as renewed fighting in the Middle East fueled fears of higher inflation and opened the door to further increases.As widely anticipated, the central bank for the 21 eurozone nations raised its benchmark rate by a quarter percentage point to 2.5%, its highest level since March 2025.It was the ECB’s second increase this year, after policymakers raised borrowing costs in June for the first time since 2023 in response to the energy shock triggered by the U.S. war on Iran.With renewed increases in energy prices expected to push eurozone inflation even higher, ECB President Christine Lagarde told a news conference that the unanimous decision by the bank’s Governing Council was a “no-brainer.”“The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period,” she said in Berlin, where rate setters were meeting during one of their periodic trips away from the ECB’s Frankfurt headquarters.Markets are penciling in further increases, but Lagarde, as usual, declined to provide clear guidance, saying the outlook was too uncertain to chart a path forward.The ECB raised its growth forecasts to 0.9% for this year and 1.4% for next year, underscoring that the eurozone economy has withstood the energy shock from the Middle East war better than feared.Lagarde said the near-term economic outlook had “improved,” adding: “We have been surprised by the resilience of our economy.”The central bank also raised its inflation projections for 2027 and 2028 while keeping this year’s forecast unchanged at 3%.Hawkish tiltAnalysts said Lagarde struck a “hawkish” tone, signaling that further rate increases were possible.“The communications from the ECB can be read as at least having a hawkish tilt,” said Roman Ziruk, an FX strategist at Ebury.Lagarde “signalled that inflation is proving more persistent than expected (and) talked up the resilience of the eurozone economy,” Ziruk said.Rising global energy prices are fueling fears of higher inflation.Brent crude, the international oil benchmark, climbed back above $100 a barrel this week, while natural gas prices, a key energy cost for Europe, reached their highest level in more than three years.The surge is being driven by an escalation in the U.S.-Iran conflict and a flare-up in fighting between Saudi Arabia and Yemeni rebels, dimming prospects that Gulf energy shipments will return to normal.For eurozone households, however, another rate increase means more expensive mortgages, consumer credit and other loans.The central bank has faced criticism in some quarters for trying to address an energy supply shock through tighter monetary policy.Rate increases are intended to slow inflation by dampening demand from consumers and businesses, but critics say they can do little to address the root cause of the current price increases: an energy shortage.So far, there has been little indication that eurozone inflation is spreading more broadly through the economy in the form of higher prices for food, goods or services.Some economists say the ECB is worried about a repeat of 2022, when the central bank was criticized for raising rates too slowly in response to the inflation surge following Russia’s invasion of Ukraine.Lagarde also faced questions about her future after recent media speculation that she could step down as ECB president before her term ends in October 2027 to become president of the World Economic Forum.She declined to address the speculation, telling journalists: “When there is something to report about me personally, you’ll be the first one to know … and there is nothing to report.”Subscribe to our free newslettersOur weekly newsletter Closing Arguments offers the latest about ongoing trials, major litigation and rulings in courthouses around the U.S. and the world, while the monthly Under the Lights dishes the legal dirt from Hollywood, sports, Big Tech and the arts.Additional Reads