ECB raises interest rates again as surging oil and gas prices push eurozone inflation further above the central bank’s target, adding pressure to households and businesses ahead of winter.
The European Central Bank raised its key interest rate by 0.25 percentage points to 2.5% on Thursday, its second increase in three months, as a conflict involving Iran continues to disrupt energy supplies and drive up costs across the euro area.
The ECB also increased its main refinancing rate to 2.65% and its marginal lending facility rate to 2.9%. The decision came as new inflation figures showed that price pressures have strengthened sharply, largely because of energy.
Eurozone inflation climbed to 3.3% in August from 2.9% in July, reaching its highest level since September 2023. Energy inflation was particularly strong, rising to 14.3% from 10.3% a month earlier. By contrast, underlying price pressures showed some improvement. Core inflation, which excludes energy, food, alcohol and tobacco, fell to 2.4%.
The ECB Governing Council said the conflict in the Middle East was continuing to create inflationary pressure and warned that inflation could remain well above its 2% target for a prolonged period.
The central bank has consequently revised its inflation outlook. ECB staff now expect inflation to average 3% in 2026, before easing to 2.5% in 2027 and 2.1% in 2028. The forecasts suggest that the current energy shock is likely to take time to work its way through the wider economy.
ECB President Christine Lagarde said the rate increase had received unanimous support from policymakers. Speaking to reporters in Berlin, she described the decision as straightforward, while making clear that the central bank has not committed itself to a particular path for interest rates.
Future decisions, she said, would be taken one meeting at a time. The ECB’s next monetary policy meeting is scheduled for 29 October.
Much of the concern is centred on the energy market. Brent crude rose above $100 a barrel on Wednesday following further exchanges between the United States and Iran and later moved beyond $105 on Thursday. At the same time, the European benchmark wholesale gas price climbed above 80 euros per megawatt hour, its highest level since January 2023.
The timing is particularly sensitive for Europe, where households and businesses are approaching the winter heating season. Higher gas prices raise the cost of heating and electricity and can also increase expenses for companies that depend heavily on energy.
Gas storage levels have added to those concerns. EU storage was reported at 67% of capacity, below the five-year average of 84%. A colder-than-usual winter, combined with further disruptions to supplies, could put additional pressure on prices.
Lagarde warned that such a combination would make the energy situation more difficult. The ECB also expects elevated energy costs to gradually affect other parts of the inflation basket, including food and underlying inflation.
Yet the latest figures do not point to a broad acceleration in every part of the economy. Services inflation declined to 3% from 3.3%, while core inflation also eased. ECB economists said earlier this month that energy supply factors were responsible for about 90% of the increase in energy inflation between January and May.
That distinction matters for the central bank. The latest rise in headline inflation is being driven largely by energy rather than by a widespread acceleration in prices across the economy. But if higher energy costs persist, they can eventually feed into transport, production, food and services, making the inflation problem harder to contain.
The ECB is also facing a difficult balance between controlling inflation and protecting an economy that has shown signs of resilience. Eurozone economic growth has been revised slightly higher, with the central bank now expecting the economy to expand by 0.9% this year, compared with its previous forecast of 0.8%. Growth is projected at 1.4% in 2027 and 1.5% in 2028.
The labour market has also remained relatively stable. Eurozone unemployment stood at 6.4% in July, suggesting that the energy shock has not yet translated into a broad deterioration in employment.
“The economy proved resilient in the second quarter despite headwinds from the energy shock,” Lagarde said.
The pressure is not evenly distributed across the euro area either. August inflation reached 4.5% in Spain, compared with 2.9% in Germany and 2.7% in France. Those differences underline one of the ECB’s recurring challenges: monetary policy is set for the euro area as a whole, even though households and businesses in individual member states can face very different levels of price pressure.
For now, the ECB is keeping its options open. Higher energy prices have pushed inflation further from its target, while the wider economy has remained stronger than some had expected. Whether the latest rate increase is followed by further action will depend largely on how the energy shock develops, how quickly inflation spreads beyond fuel and gas, and whether economic activity can continue to withstand the pressure.
