The European Central Bank (ECB) raised interest rates for the first time in 2 years and 9 months on concerns about inflation stemming from the Middle East. It is the first rate hike among Group of Seven (G7) economies' Central Banks since the Iran war broke out at the end of February this year.

The ECB on the 11th (local time) raised the deposit rate by 0.25 percentage points (p) to 2.25% from 2.00% at a monetary policy meeting in Frankfurt, Germany. The main refinancing rate, the benchmark rate, was raised by 0.25 percentage points to 2.40%, and the marginal lending facility to 2.65%.

Christine Lagarde, president of the European Central Bank (ECB), attends a press conference after the monetary policy meeting at the ECB headquarters in Frankfurt, Germany, on the 11th. /Courtesy of AFP Yonhap

It is the ECB's first rate hike since September 2023. After lifting the deposit rate to 4.00% at that time, the ECB shifted to an easing stance starting in June last year and cut it to 2.00%, but returned to tightening after one year as tensions in the Middle East have intensified recently.

The ECB said, "The war in the Middle East is creating upward pressure on prices," adding, "This decision is a measure to respond to the uncertainty caused by the war."

The ECB raised its forecast for consumer price inflation in the eurozone (21 countries using the euro) for this year to 3.0% from 2.6% and for next year to 2.3% from 2.0%. It lowered its economic growth forecast to 0.8% from 0.9% for this year and to 1.2% from 1.3% for next year. The ECB projected that inflation will reach its 2% target level only in 2028.

The ECB assessed that rising energy prices could lead to broader price increases in food and services. However, it said the growth forecast reflects the impact of the war on economic sentiment, including surging raw material prices and weakening consumer confidence.

Last month, eurozone consumer prices rose 3.2% from a year earlier, above the ECB's 2% target. In contrast, first-quarter gross domestic product (GDP) fell 0.2% from the previous quarter, raising concerns about stagflation (recession amid high inflation).

With this rate hike, the gap between the eurozone deposit rate and Korea's base rate (2.50%) has narrowed to 0.25 percentage points. The higher rates take effect on the 17th.

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