European Central Bank raises interest rates amid Middle East inflation pressures

The European Central Bank (ECB) has raised interest rates by 25 basis points, marking the first increase since 2023. The decision follows a rise in eurozone consumer price inflation to 3.2% in May 2026, driven largely by energy cost pressures stemming from the conflict in the Middle East.

The ECB increased its main deposit facility rate from 2% to 2.25%. The rate for main refinancing operations rose to 2.4% from 2.15%, while the marginal lending facility increased to 2.65% from 2.4%. ECB President Christine Lagarde noted that the war in the Middle East continues to create uncertainty regarding medium-term inflation and economic growth.

Accompanying research from the ECB highlights that the impact of such rate decisions varies across the banking sector. A study found that the speed and extent of interest rate pass-through depend on how banks fund themselves. Banks relying on short-term money market funding tend to adjust lending and deposit rates more aggressively, whereas those utilizing long-term bond funding respond more slowly to policy changes.