ECB raises rates to 2.5% as energy shock lifts inflation
The second increase in three months comes with euro-area inflation at 3.3% and energy inflation at 14.3%. Core inflation actually fell, which is why the move was a quarter point rather than more.
The European Central Bank raised its deposit facility rate by a quarter of a percentage point to 2.5% on Thursday, its second increase in three months, and said the war in the Middle East would keep inflation above target for an extended period.
The decision was fully expected — markets had priced the move at 100% before the meeting — but the reasoning matters more than the surprise. The eurozone is not tightening because its economy is running hot. It is tightening because the price of energy has been set for the past seven months by fighting around the Strait of Hormuz, and the Governing Council has decided it can no longer wait to see whether that washes through.
The numbers behind the vote
Euro-area inflation reached 3.3% in August, up from 2.9% in July and the highest reading since September 2023. Almost the whole of that increase sits in one line. Energy prices were 14.3% higher than a year earlier, against 10.3% in July, with crude supply squeezed by the fighting around the Strait of Hormuz. Brent was back above $100 on Wednesday as exchanges between American and Iranian forces intensified.
Take energy out and the readings look ordinary. Core inflation — the measure that leaves out energy, food, alcohol and tobacco — eased to 2.4% from 2.5%. Services prices, where wage costs show up first, came in at 3% against 3.3% a month earlier. Costly fuel has not yet spread into the rest of the price level, which is exactly the spread a central bank raises rates to prevent.
Alongside the deposit rate, the main refinancing rate went to 2.65% and the marginal lending facility to 2.9%. All three take effect on 16 September.
An energy shock, not a demand shock
The ECB has been unusually explicit about the difference. Bank economists put a number on it this month. Of the increase in energy inflation recorded between January and May, roughly 90% traced back to supply disruption rather than to anything happening inside the euro-area economy.
"This time the energy supply shock dominates, while demand and public policy stimulus have minor roles," the economists wrote, drawing a contrast with the surge of 2021 and 2022 that drew a far more aggressive response.
That distinction explains the modest pace. A central bank cannot produce oil. What it can do is stop a one-off jump in import costs from being written into next year's wages and contracts, and 25 basis points at a time is the instrument for that job.
The council's statement was blunt about the duration, saying inflation is "set to remain well above target for an extended period" while insisting the bank is well placed to handle the uncertainty the war has created.
Fresh staff projections put headline inflation at an average of 3% this year, 2.5% in 2027 and 2.1% in 2028, with the last two figures marked up since June. They were closed about a fortnight before the council met, so this week's move in crude is not in them at all.
One rate, very different economies
The bloc-wide figure hides a lot. Spain recorded 4.5% in August, Germany 2.9% and France 2.7% — the same imported shock landing on three economies and producing three answers. One policy rate has to serve all of them, and at 2.5% it still sits inside the band the ECB treats as neutral. Anything above that would amount to a judgment that the economy needs holding back, rather than that it no longer needs help.
Growth complicates the call. Activity has been sturdier than most forecasters expected, and sturdy is not the same as hot. Christine Lagarde, the ECB president, said that despite what she called the greater-than-expected resilience of the euro-zone economy, the energy price shock and global trade tensions remained a risk to growth. The Governing Council said the outlook remains highly uncertain, with risks tilted up for inflation and down for growth.
What the market thinks comes next
Investors read the decision as the middle of a sequence rather than the end of one.
Ed Hutchings, head of rates at Aviva Investors, said the inflation outlook remained a significant source of concern for the council and for investors. "It's clear more hikes will be coming, and potentially more than one," he said — while warning that with two increases delivered and more than two further ones already priced, expectations may have run ahead of the case.
Patrick Ernst, a macro investment strategist at JP Morgan Private Bank, said policymakers had kept the door open deliberately. "One hike is not a ceiling," he said, arguing that an energy-led inflation risk is still very much in play. Felix Feather, an economist at Aberdeen, expects another increase at the December meeting.
There is a second pressure the ECB does not control. European government bond yields have climbed to multi-decade highs in recent weeks as investors priced in higher inflation and further tightening, raising borrowing costs for governments already carrying the fiscal weight of the energy shock.
Lagarde had prepared the ground in July, when the council held rates but told staff to model oil and gas scenarios before September. The burden of proof, she said then, is on data — and added that the full inflationary impact of the energy shock had yet to play out. Thursday's decision is what that sentence looks like once the data arrives.
