The European Central Bank raised its benchmark deposit rate by 0.25 percentage points to 2.5% on Thursday, tightening policy for the second time this year as higher energy prices pushed inflation further above target.

The ECB also lifted its main refinancing rate to 2.65% and the marginal lending rate to 2.9%, with the changes due to take effect on 16 September. The decision was widely expected but underlined the Governing Council’s concern about longer-lasting price pressure.

Euro-area inflation reached 3.3% in August, well above the ECB’s 2% objective. Oil prices above $100 a barrel and sharply higher European gas costs have raised the risk that expensive energy will spread into transport, manufacturing and services.

ECB President Christine Lagarde said the Middle East conflict continued to generate inflation pressure and warned that the outlook carried upside risks for prices and downside risks for economic growth. She gave no commitment on the direction of the next rate decision.

The central bank now expects inflation to average 3% in 2026. At the same time, it lifted its forecast for euro-area growth this year to 0.9%, pointing to an economy that has remained more resilient than previously anticipated.

Higher policy rates are intended to restrain demand and prevent an energy shock from becoming embedded in wider prices and wages. The trade-off is that mortgages, corporate credit and government financing may become more expensive across the 21 countries using the euro.

Investors will scrutinize energy markets and forthcoming inflation data to judge whether another increase is likely. The ECB said future moves will be made meeting by meeting, based on economic data and evidence about how strongly its decisions are affecting financing conditions.

Sources: Associated Press; Reuters.

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