The European Central Bank raised its key rate to 2.25% and indicated another hike in September amid upwardly revised inflation forecasts.
The European Central Bank raised its benchmark interest rate by 25 basis points to 2.25%, marking its first increase since 2023. The move aligns with market expectations but removes residual dovish interpretations due to upward revisions in inflation forecasts and a clear signal of another hike in September.
The ECB revised its 2026 inflation forecast to 3.0% from 2.6% and its 2027 forecast to 2.3% from 2.0%. Growth projections were downgraded to 0.8% for this year and 1.2% for 2025. Forward-looking indicators suggest energy price shocks are gradually transmitting to other sectors, though less severely than in 2022.
European sovereign spreads and rate-sensitive sectors face renewed pressure as markets adjust to a higher-for-longer rate scenario through 2027. The euro may gain near-term support from rate differentials, though growth concerns limit upside potential.