ECB Hikes Interest Rates First Time Since 2023 Amid Iran War, Inflation Concerns

The European Central Bank (ECB) is set to hike interest rates today for the first time since September 2023, making it the first major central bank to respond to the energy shock from the US-Israeli war against Iran. This move comes despite concerns it could hinder growth in the struggling eurozone, which contracted in the first quarter, partly due to a slump in Ireland.

Eurozone inflation accelerated to 3.2% in May, exceeding the ECB’s two-percent target, primarily due to the closure of the Strait of Hormuz. UniCredit bank anticipates an increase in the key deposit rate from 2.00% to 2.25%. While some economists, like Berenberg bank’s Holger Schmieding, argue a hike would be a mistake, fearing it exacerbates Iran war damage and does little to address supply-driven inflation, ECB officials may be wary of delaying action after past criticism.

Investors await ECB President Christine Lagarde’s press conference for future guidance. Most analysts do not expect an aggressive hiking cycle, with Capital Economics’ Jack Allen-Reynolds predicting another hike in July, then a pause, as the effects of higher energy prices on inflation are expected to be limited.