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The European Central Bank (ECB) raised interest rates for the first time in almost three years on Thursday, as a rise in energy prices caused by the war with Iran boosts inflation.
The ECB raised the euro zone's key interest rate by a quarter of a percentage point to 2.25%, becoming the first major central bank to raise borrowing costs since the start of the war on February 28.
"The war in the Middle East is generating inflationary pressures. The outlook remains uncertain, with upside risks to inflation and downside risks to economic growth ," the central bank said in a statement.
Inflation in the 21 countries that use the euro stood at 3.2 percent last month, down from 3 percent in April, as energy prices rose. The ECB, like other major central banks, targets an inflation rate of around 2 percent.
Europe is heavily dependent on imported fossil fuels to power its economy and is spending billions of dollars more on energy imports because of the war. Rising energy costs threaten to hamper a fragile economic recovery in the region, which only recently emerged from an energy crisis caused by Russia's invasion of Ukraine in 2022.
Headline inflation peaked at 10.6 percent in the euro area in October 2022. Meanwhile, interest rates reached a record high of 4 percent in September 2023, following a prolonged campaign of interest rate hikes to dampen rising prices.
The International Monetary Fund forecasts eurozone growth of 1.1 percent this year, according to an April estimate, a 0.2 percentage point drop from its January forecast.
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