ECB delivers first rate hike since 2023

On 11 June 2026 the European Central Bank’s Governing Council decided to raise its three key interest rates by 25 basis points. The move increases the deposit facility rate to 2.25%, the main refinancing operations rate to 2.40%, and the marginal lending facility to 2.65%. The new rates take effect from 17 June 2026 and apply across the euro area monetary framework.

This decision marks the first increase in ECB interest rates since September 2023. It follows a period in which policy had remained on hold even as price pressures persisted, and brings the ECB in line with a more restrictive policy stance aimed at containing inflation.

The rate hike comes against a backdrop of rising inflation indicators. Headline inflation in the euro area reached 3.2% in May, while core inflation, which excludes energy and food, rose from 2.2% to 2.5%. These readings indicated that underlying price pressures were not easing as quickly as previously expected.

Reflecting this environment, the ECB revised its inflation outlook upward. It now projects headline inflation to average about 3.0% in 2026 and 2.3% in 2027. Core inflation is projected at about 2.5% for both 2026 and 2027, signalling that underlying price growth is expected to remain above the 2% target for some time.

At the same time, the growth outlook has been downgraded. The ECB cut its GDP growth forecasts to roughly 0.8% for 2026 and 1.2% for 2027, indicating that tighter financial conditions and elevated energy costs are weighing on activity.

Policymakers highlighted geopolitical tensions as a key factor behind the decision. The war in the Middle East, including conflict involving Iran, and disruptions to oil shipments through the Strait of Hormuz are cited as amplifying inflationary pressures in the euro area.

These developments have pushed up energy prices relative to previous expectations, feeding through to the ECB’s higher projections for both headline and core inflation. Staff explicitly linked the upward revision of inflation in 2026 and 2027 to a higher assumed path for energy prices.

The Governing Council stressed that it will follow a data-dependent, meeting-by-meeting approach and will not pre-commit to a particular path for interest rates. It said it remains ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at 2% in the medium term and to preserve smooth monetary policy transmission.

The ECB confirmed that the portfolios under its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) are declining at a measured and predictable pace. This reflects the decision to stop reinvesting principal payments from maturing securities, allowing the balance sheet to shrink over time.

The central bank also underlined that the Transmission Protection Instrument remains available to counter unwarranted, disorderly market dynamics. Market participants and economists were reported to be anticipating at least one further 25 basis point rate increase later in the year, with some forecasts pointing to September as a potential timing, though the ECB itself has not signalled any commitment to such a move.