The European Central Bank raised interest rates on September 10, increasing its benchmark deposit rate by a quarter point from 2.25% to 2.5%. This marks the second hike in three months since the war in the Middle East broke out in February.
The decision follows an energy shock driven by the Iran war, which has sent energy prices soaring and pushed oil above $105 a barrel. Geopolitical tensions, including US and Iran attacks on ships in the strait of Hormuz, have caused oil and gas prices to jump and government bond interest rates to soar.
The bank warned that inflation is set to remain well above the 2% target for an extended period. While the region's economy has proven surprisingly robust, officials expect further rate increases, with another possible as soon as next month.
For households in the euro area, these rising borrowing costs mean more expensive mortgages, consumer credit, and other loans. The central bank has faced criticism in some quarters for attempting to tackle an energy supply shock with tighter monetary policy.