Middle East war is hurting eurozone economy, warns ECB, after announcing first interest rate rise since 2023 – business live

Key events

Christine Lagarde then insists that the ECB has not been complacent in its handling of the eurozone economy.

“I don’t like to brag and I’m not full of vanity,” she insists, before pointing out that the ECB had kept inflation near its 2% target for the last 12 months (before the Iran war pushed up costs).

“We have not been complacent, we have done our job.”

Lagarde: A bank's gotta do....

Q: Quite a few economists had warned that an interest rate rise today would be a mistake – what’s your response?

Christine Lagarde replies that “everybody has to do what they have to do”.

The ECB’s job is price stability, she points out, and to follow its reaction function [how it adjusts monetary policy in response to evolving economic conditions].

She then cites the inflation outlook, and the risks to the upside on inflation, to defend today’s interest rate hike.

Lagarde: decision was unanimous

European Central Bank (ECB) President Christine Lagarde at today’s press conference in Frankfurt, Germany Photograph: Heiko Becker/Reuters

Onto questions!

Q: did the ECB’s governing council consider holding interest rates today, or consider a larger increase in rates?

Lagarde (who appears to be sporting a starfish brooch) reveals that the decision to raise rates by a quarter-point was unanimous, and based on the latest forecast from ECB economists.

She says:

The decision that we took today to raise, by 25 basis points, our three interest rates was a unanimous decision without reservation.

We did not discuss or debate any other alternative proposal.

Lagarde: The risks to the growth outlook are to the downside, due to Middle East war

European Central bank president Christine Lagarde then warns that the ongoing Iran war is threatening the eurozone’s growth outlook.

“The risks to the growth outlook are to the downside, mainly owing to the war in the Middle East, which has added to the volatile global policy environment. Prolonged disruption of energy supplies could increase energy prices further and for longer than currently expected,” Lagarde tells reporters in Frankfurt.

These factors would erode real incomes, and make firms and households more reluctant to invest and spend, she warns.

And the situation could worsen, she warns, if European companies are hit by shortages due to supply chain disruption.

Lagarde says:

The drag on growth would intensify if the closure of major shipping routes were to cause acute shortages of key inputs that forced euro area firms to curtail output.

A worsening of global financial market sentiment, or a tighter supply of credit, could company demand. Additional frictions in international trade could also further disrupt supply chain, reduce exports, and weaken consumption and investment.

On the economic situation, Christine Lagarde argues that the euro area economy grew in the first quarter if you adjust for a temporary factor in Ireland.

That “temporary factor” is that Ireland’s GDP shrank by 12% (!) in the last quarter, due to a plunge in activity at its multinational companies.

That pulled the eurozone into an official contraction in the first three months of 2026, but yet the picture is better if you exclude Irish GDP (and GDP is not a good measure of Ireland’s economy).

Lagarde then insists that the ECB is “not pre committing to a particular rate path”.

She says:

In particular, our interest rate decisions will be based on our assessment of inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission.

Christine Lagarde then warns that the outlook for the eurozone remains uncertain, with upside risks for inflation and downside risks for economic growth.

She tells reporters in Frankfurt:

The full implication of the war for medium term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second round effects.

Lagarde: The war in the Middle East is generating inflation pressures

ECB president Christine Lagarde is holding a press conference now to explain today’s interest rate hike.

Lagarde begins by warning that the Iran war is creating inflation pressures in the euro area.

The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at our 2% target in the medium term.

In line with this commitment, we today decided to raise the three key ECB interest rates by 25 basis points. The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios, mapping out how the shock might evolve and affect the medium term outlook for the euro area.

Lagarde then outlines how the ECB’s economists have raised their inflation forecasts, and cut their prediction for growth (as covered earlier in this blog).

Today’s interest rate hike from the ECB won’t be the last this year, predicts Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK:

“As expected, the ECB hiked rates by 25bps today. The next move will depend on how energy prices evolve over the summer, but the risks are clearly skewed to another rate hike later this year. However, a weaker labour market and soft economy will limit second-round effects and reduce the need for further tightening.

“Given inflation has already jumped to 3.2% in May and there is growing evidence of further inflation in the pipeline with PPI surging from -3.0% in February to 4.9% in April, today’s rate hike was inevitable. In addition, the updated forecasts show the ECB expects core inflation to average 2.5% this year and next, up from 2.3% and 2.2% respectively.

Today’s rate hike makes the ECB the first G7 central bank to raise interest rates in response to the Iran war.

The US Federal Reserve, the Bank of England, and the Bank of Japan, all meet next week. The BoJ is expected to raise rates, while the BoE and the Fed probably won’t….

Eurozone growth forecasts lowered

Disappointingly, the ECB has lowered its forecast for growth in the euro area.

Its baseline forecasts now show economic growth at an average of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028.

The bank says:

This is a downward revision for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence.

In March, the ECB had expected growth to average 0.9% in 2026, 1.3% in 2027 and 1.4% in 2028.

ECB raises inflation forecast

The ECB has also rised its forecasts for inflation, due to the knock-on impact of the Iran war on energy prices.

Headline inflation is now expected to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028.

Back in March, the ECB had forecast inflation would be 2.6% in 2026, 2.0% in 2027 and 2.1% in 2028.

The ECB explains:

Compared with March, staff have revised up their baseline projection for inflation in 2026 and 2027 owing to a higher path for energy prices, which, to some extent, is expected to feed into food, goods and services inflation.

ECB raises eurozone interest rates by 25 basis points

Newsflash: the European Central Bank has increased borrowing costs across the eurozone for the first time since September 2023.

The ECB’s governing council voted to increase interest rates by a quarter of one percentage point.

Policymakers hiked borrowing costs after eurozone inflation rose to 3.2% last month, as the Middle East crisis pushed up energy costs.

Announcing the decision, the ECB says:

The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.

This increases the rate on the ECB’s deposit facility, which banks can use to make overnight deposits with the Eurosystem, to 2.25% up from 2%.

The interest rate on the ECB’s main refinancing operations, which commercial banks use to borrow funds from the ECB, is going up to 2.4% from 2.15%.

And the rate on the marginal lending facility, which offers overnight credit to banks, rises to 2.65% from 2.4%.

ECB expected to raise interest rates shortly

The eurozone is bracing for its first interest rate rise since 2023, as the European Central Bank prepares to set borrowing costs across the single currency region.

The ECB is expected to increase eurozone interest rates by a quarter of one percentage point today, to combat inflationary pressures from the Iran war.

Eurozone inflation rose to 3.2% last month, further above the ECB’s target of 2%, putting pressure on policymakers to tighten policy – even though costs are being driven up by external factors beyond the EBC’s control.

Kathleen Brooks, research director at XTB, explains:

The fear is that the ECB could make the same mistake as it did in 2011, when it hiked rates right before the sovereign debt crisis. Today’s hike could exacerbate the growth issues in the currency bloc, and that could weigh on the ECB’s credibility, something that [ECB president Christine] Lagarde and co will want to avoid.

There is a growing chorus that this rate hike won’t bring down inflation, which is caused by an international energy supply crunch. Due to this, Lagarde may want to deliver as neutral a message as possible later today, and the bar is high for Lagarde to deliver a hawkish surprise.

The ECB’s decision is due at 2.15pm in Frankfurt, or 1.15pm UK time, followed by a press conference 30 minutes later.

Back in the airline sector, Wizz Air has reported a slump in profits after the Iran war hit its earnings.

Wizz’s operating profits shrank by 16.6% to $139.7bn in the year to 31 March, with net profits shrinking by over 99%, despite transporting 10% more passengers than a year before.

Wizz told shareholders it had faced a number of “one-off headwinds” in the last year,including the forced cancellation of Tel Aviv and other Middle East routes during the 2025 peak summer period as well as the cancellation of Middle East and Cyprus routes in March 2026.

The Iran conflict in March 2026 knocked €50m off its earnings, but this was “largely mitigated by fuel hedges put in place prior to the conflict”, it says.

Wizz declined to give any forecasts for the current year, citing the lack of visibility about how events will develop, uncertainty related to the ongoing conflict in Iran and the closure of the strait of Hormuz. Shares are up 6.7% this morning, though.