The European Central Bank raised its benchmark deposit rate to 2.5 percent on September 10, marking a quarter-point increase and the second hike since the Iran war broke out in February. This decision comes as the bank responds to persistent price pressures and inflation that remains locked well above its 2 percent target.
The rate hike follows an energy shock driven by the Iran war. Recent US and Iran attacks on ships in the strait of Hormuz have sent energy prices soaring, pushing oil above 105 dollars a barrel. The bank warned that the risk of higher inflation over the next year has risen following renewed fighting in the Middle East.
The move has led to a selloff in European bonds and soaring government borrowing costs. For households in the euro area, the increased 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.
President Christine Lagarde flagged ongoing risks to inflation, warning that prices could remain high for an extended period. According to people familiar with the situation, officials expect to raise interest rates further, with another increase possible as soon as next month.