ECB Raises Interest Rates

Today, the ECB (European Central Bank) voted in an unanimous decision to hike its key deposit interest rate by 25 basis points from 2.00% to 2.25%, with data confirming this is the first rate increase by the ECB since September 2025. The ECB also raised its main refinancing operations rate to 2.40% and their marginal lending facility rate to 2.65%, the difference in these three rates are explained below*. 

*ECB Interest Rates – The ECB has three interest rates; the key deposit rate is the interest rate banks receive when they deposit money overnight with the ECB. The other two facilities are the main refinancing operations, which is the rate banks pay when they borrow money from the ECB for one week, and the Marginal Lending Facility, which is the rate banks pay when they borrow money overnight from the ECB.

The interest rate hike came as no surprise to financial markets, with experts advising this move had been telegraphed by the ECB for quite some time. This decision is a clear reversal of the monetary easing approach taken by the ECB throughout most of last year, and analysts advise it is mainly due to energy prices rising by 10.90%, driving headline inflation to 3.20% in May (up from 3.00% in April). As data reveals, it is the highest since September 2023. Furthermore, core inflation (not including food and energy) hit 2.50% in May up from 2.20% in April, showing that it is not only energy prices that are being impacted from the USA/Iraq/Israel conflict.

The policymaker responsible for the ECB’s market operations, Isabel Schnabel, according to officials, was the board member who made her point most forcefully beforehand to raise interest rates today. She said whether or not a peace agreement in the Middle East occurs now, the duration of the current conflict and how the broader economy was reacting to increased energy prices, should force the ECB to raise interest rates. Schnabel also went on to say that inflation in the eurozone could hit 4.00% by the end of the year.

At a press conference, ECB President Christine Lagarde said, “We are beginning to see a broadening of inflation throughout the economy, and that is obvious in terms of direct effect – not yet at this point in front of the second round effects*, but we are going to be extremely attentive”. The President went on to say that, “Our discussions were predicated on, obviously the major energy shock that we have observed since the beginning of March, that is enduring longer than expected by geopolitical experts, and which we are beginning to see broadening throughout the economy”.

*Second round effects – In these scenarios, second round effects are price and wage-settings stemming from the current shock that have the potential to raise Eurozone inflation beyond the near-term in a persistent manner.

President Lagarde has kept her options open regarding further interest rates, and financial markets are predicting that the ECB may raise interest rates a further two or three times by the end of 2026. Traders are currently pricing in a deposit rate reaching up to 2.75% with swap markets heavily pricing in another 25 basis point increase.