The European Central Bank said it was unable to overlook the energy shock at its meeting in June, as higher energy prices were expected to push inflation above its 2% target over the medium term.

The ECB's governing council last month made a unanimous decision to raise its key interest rate to 2.25%, becoming the first major central bank to hike on the back of elevated energy prices due to the war in Iran.

"It was now clear that the current situation no longer qualified as a case for looking through the shock," the ECB said in its account of its June meeting.

"The longer energy prices stayed high, the more likely they were to drive up broader inflation through indirect and second-round effects. Such dynamics would raise the risk of the energy shock becoming embedded in underlying inflation and in medium and longer-term inflation expectations."

The central bank faced criticism for reacting too slowly in 2022, when the surge in energy costs following Russia's invasion of Ukraine fueled an inflationary spiral that pushed eurozone consumer price growth above 10%.

While economists see a smaller risk of a broad-based inflation surge this time--partly because the economy is weaker and interest rates are already elevated--the ECB has repeatedly said it stands ready to act to prevent a repeat of that episode.

Still, the ECB said there was little evidence in June that higher energy prices were pushing up wage growth--a key consideration for the central bank when assessing longer-term inflationary trends.

"However, wages only adjusted with a significant lag. With the labour market still relatively resilient, it was argued that, over time, workers could seek to recoup lost purchasing power," it said.

The update from the ECB follows comments by President Christine Lagarde, who at a panel in Sintra, Portugal last week defended the central bank's decision to raise interest rates in June.

"Some have characterized our rate increase earlier this month as an 'insurance hike.' That is not an accurate description," Lagarde said at the opening of the ECB's central-banking forum in Sintra, Portugal.

She added that the decision to raise interest rates was justified based on all scenarios the central bank had considered.

"Nothing we have observed since then has called this assessment into question," Lagarde said.

Write to Don Nico Forbes at don.forbes@wsj.com and Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

July 09, 2026 08:16 ET (12:16 GMT)

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