ECB Hikes Rates, Warns of Stagflation from Middle East Conflict

The European Central Bank raised its deposit rate by 25 basis points to 2.25% on Thursday, matching expectations, and said the Middle East conflict is pushing inflation higher through energy costs. Policymakers warned that higher energy prices would feed into food and services inflation, signaling concern about sustained price pressures.

New staff forecasts show headline inflation averaging 3.0% in 2026 and 2.3% in 2027, before easing to 2.0% in 2028. Core inflation is projected at 2.5% across 2026 and 2027, then 2.2% in 2028. The ECB attributed the upward revisions to the war's impact on energy markets.

Growth forecasts were cut. GDP is now seen at 0.8% in 2026 and 1.2% in 2027, with a 1.5% projection for 2028. The bank cited commodity prices and weaker confidence as key factors. Lower real incomes also played a role.

The updated projections show a stagflationary tilt. The ECB's own numbers imply higher inflation and weaker growth, which would keep the central bank from cutting rates anytime soon. That typically supports bond yields and gives the euro some bid, though the growth drag caps the upside.

The ECB stopped short of signaling another hike. Policymakers repeated that the outlook is uncertain and that future decisions will depend on incoming data. "We are not pre-committing to a particular rate path," the statement said.

The next data points are euro-area inflation prints and the Bank's assessment of energy prices. For daily updates, visit the forex market analysis page.