ECB raises interest rates for the first time since 2023. There are two past errors weighing on the decision

It is the first time since September 2023 that the European Central Bank has raised base interest rates. The increase is due to the inflation shock caused by the conflict in Iran.

The European Central Bank (ECB) decided today raise interest rates by 25 basis pointsto 2.25%, in what was the first increase in policy rates in almost three years, since September 2023.

The Governing Council “decided today to increase the ECB’s three key interest rates by 25 basis points”, as “the war in the Middle East is generating inflationary pressures and the decision to increase interest rates appears to be robust given a set of scenarios, which map out how the shock could evolve and affect the medium-term prospects for the euro area”, reads the decision published today.

The latest increase in policy rates had occurred in 2023with a pause period until June 2024, when the ECB began to cut interest rates. Since July 2025, the central bank has kept interest rates unchanged, now changing rates again to increase them by 25 basis points.

With this decision, the interest rates applicable to the deposit facility, main refinancing operations and the liquidity lending facility will be increased to, respectively, 2.25%, 2.40% and 2.65%, with effect from June 17, 2026.

The forecasts, drawn up by Eurosystem experts, were also updated, indicating that the Global inflation will average 3% in 2026, 2.3% in 2027 and 2.0% in 2028, in the euro zone.

Economic growth was revised downwards to 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028, “reflecting a more pronounced impact of the war on raw materials markets, real incomes and confidence”.

Past mistakes haunt the ECB

The decision comes at a time when the inflation in the euro zone reached 3.2%the highest level since 2023 and well above the BC’s 2% target. The new surge in energy prices driven by the conflict in Iran has brought back memories of the inflationary shock that followed the war in Ukraine.

This episode continues to cast a long shadow over the ECB. The institution faced criticism for respond too slowly inflation accelerated to double digits, forcing policymakers into a series of aggressive interest rate increases.

At the same time, policymakers remain wary of a repeat of another historic mistake from 2011, when the ECB raised rates in response to an energy-driven inflationary spike, just to reverse the decision with the weakening of economic growth.

“The question for any central bank right now is try to consider two possible errors of monetary policy. One of them is to act later than you should and then perhaps end up having to do more than you would like. The other is that making increases when you shouldn’t, because, in fact, the underlying dynamics are very different”, explains Paul Hollingsworth, head of developed markets economics at French bank BNP Paribas, to .

The challenge now is to determine whether the current price rise represents a lasting inflationary threat or just a temporary supply shock. Raising rates too slowly could allow higher energy costs to be reflected in wage demands and consumer prices generally, undermining the ECB’s credibility. However, acting too aggressively risks weakening an already fragile eurozone economy.

Financial markets currently expect the ECB to continue on a path of cautious monetary tightening, with forecasts pointing to two additional rate increases before the end of the year. Such a trajectory would raise the deposit rate to 2.75%.