ECB lifts the deposit rate to 2.5% as the Iran war keeps inflation high

The European Central Bank raised all three key rates by 25 basis points on Thursday, the second increase this year, and put the deposit facility at 2.50 percent. The main refinancing rate moves to 2.65 percent and the marginal lending facility to 2.90 percent from 16 September.

The Governing Council met in Berlin, continuing its practice of holding one meeting a year outside Frankfurt. The statement named the Middle East conflict as the source of the inflation pressure and said inflation is set to remain well above the 2 percent target for an extended period.

New staff projections put headline inflation at 3.0 percent in 2026, 2.5 percent in 2027 and 2.1 percent in 2028. The 2026 figure matches June. The 2027 and 2028 figures were revised up. Inflation excluding energy and food is seen at 2.5 percent this year, 2.6 percent next year and 2.3 percent in 2028. Growth was revised up to 0.9 percent in 2026, 1.4 percent in 2027 and 1.5 percent in 2028.

Why the hike was treated as insurance

Euro area inflation moved back above 3 percent last month as oil and gas prices rose with the seventh month of the United States-Iran war. Brent has traded through $100 a barrel this week. The ECB said risks to inflation sit on the upside and risks to growth sit on the downside. Staff prepared scenarios for different lengths and intensities of the energy shock, including second-round effects on wages.

President Christine Lagarde said the economy has been more resilient than expected, held up by consumption, public investment and services. She repeated that the Council is not tied to a particular rate path and will decide meeting by meeting.

At 2.5 percent the deposit rate sits at the top of the band that many governors treat as neutral, neither cooling nor stimulating demand. Markets after the announcement priced a further quarter point at the 29 October meeting at a little over 60 percent, and about 35 basis points of extra tightening by year end.

What the numbers leave out

ING's post-meeting note pointed out that the latest jump in bond yields and the move in oil toward $105 were not fully inside the staff baseline. If those prices stick, the 2027 inflation figure will look low. If the war shortens after the United States midterms, as President Donald Trump has claimed in public, the energy term could fade faster than the scenarios allow.

Core and services inflation and survey measures of expectations have so far shown little second-round damage. That is why some governors still describe Thursday as an insurance move rather than the start of a long tightening cycle. The statement itself did not use that word. It said only that the Council wants inflation back at 2 percent in the medium term and that the outlook is highly uncertain.

The euro area is 21 countries. Energy intensity and wage-setting rules differ sharply between them. A German manufacturer facing $100 oil is not in the same position as a Spanish services firm. The single rate has to cover both. That is the old constraint, now sharpened by a war that the ECB cannot influence and that the United States calendar may or may not end.

For households the deposit rate is an abstract. Mortgage resets and the price of diesel are not. The Council has chosen to move before wage rounds bake in the energy spike. Whether that choice holds depends on crude, on Iranian and American tankers, and on whether October's data still show inflation stuck near 3 percent. The next scheduled date is 29 October. The Council has left itself room to stop or to go again.