The European Central Bank raised interest rates by 25 basis points on Thursday, lifting its main policy rate to 2.25%, citing persistent inflationary pressures from Middle East conflicts that have pushed inflation away from its target.

According to data from London Stock Exchange Group, market expectations for a rate increase of at least 25 basis points were near 100% ahead of the ECB's June Governing Council meeting.

The ECB Governing Council stated that the rate hike is intended to counter inflationary pressures stemming from heightened geopolitical tensions in the Middle East.

The central bank's policy statement noted: "The situation in the Middle East is intensifying inflationary pressures. Considering various scenario analyses that assess the evolution of this shock and its impact on the medium-term economic outlook for the euro area, the decision to raise rates is fully justified."

The ECB also revised its inflation projections upward, now forecasting average headline inflation in the euro area at 3% for 2026, easing to 2.3% in 2027, and declining further to 2% in 2028.

The central bank indicated that the upward revision to inflation forecasts is primarily due to expectations of higher energy prices, which are anticipated to subsequently affect food, goods, and services prices.

Concurrently, the ECB downgraded its economic growth forecasts for the current and upcoming years. The latest projections show average eurozone economic growth at 0.8% for 2026, 1.2% for 2027, and 1.5% for 2028.

Central bank officials attributed the downgrade in growth expectations to the increased impact of the conflict on commodity markets, household real incomes, and market confidence.