The European Central Bank raised interest rates on Thursday, the second time it has tightened since the Iran war started in late February.

Policymakers hiked their key rate to 2.5% from 2.25%, which was widely expected. The decision comes as the conflict in the Middle East drives up oil and natural-gas prices, with euro zone inflation running at its highest level in almost three years.

"We will continue to monitor closely the size and persistence of the energy-price increase," ECB President Christine Lagarde said, adding that "the risks to the growth outlook are to the downside."

ECB staff are forecasting headline inflation of 3% and growth of 0.9% this year, and inflation of 2.5% and growth of 1.4% for 2027.

The euro slid 0.3% against the U.S. dollar on Thursday. Europe's flagship Stoxx 600 index fell 0.6%.

The decision may set the stage for further tightening in 2026, although Frankfurt will have to make sure it doesn't crush growth.

"The ECB still needs to tread carefully," said Deutsche Bank's chief European economist Mark Wall, who is forecasting another rate hike in December.

"The economy has been resilient over the last six months, but rapidly rising gas prices mean the negative supply shock is building," he added.

The ECB's rate hike could do some of the talking for the Federal Reserve, which has gone quiet under Chairman Kevin Warsh.

The Fed boss has left investors scrabbling for economic clues, shelving forward guidance and favoring shorter policy statements over his first summer in charge.

In that information void, the market may take the ECB's move as a signal that U.S. policymakers will also hike borrowing costs in a bid to deal with the inflation flare-up.