The European Central Bank (ECB) is poised to raise interest rates for the first time since September 2023. This decision comes as a response to rising inflation driven by disruptions in energy supplies due to the ongoing conflict in the Middle East.
Economists and investors anticipate that the ECB will increase its key interest rate by a quarter of a percentage point, bringing it to 2.25 percent. This move marks the first rate hike by the ECB since 2023 and aims to address the economic impact of the war.
The conflict in the Middle East has resulted in the closure of the Strait of Hormuz, a vital passage for energy and other commodities located off Iran’s southern coast, for over three months. In May, the eurozone’s inflation rate reached 3.2 percent, driven by escalating energy prices, which is significantly above the central bank’s 2 percent target. Prior to the conflict, inflation was slightly under this target.
“Whatever happens with the conflict, you can argue that a lot of damage has been done to inflation in the short term,” said Frederik Ducrozet, head of strategy and macro research at Pictet Wealth Management.
According to Ducrozet, policymakers believe that even if the Strait of Hormuz were to reopen, disruptions to energy supplies will likely continue, thus maintaining “inflationary risks.”
Globally, rising costs for energy, fertilizer, and other goods exported through the Persian Gulf are contributing to inflation. These increases are impacting economic growth, compelling central banks to weigh the risks associated with higher prices against those linked to a potential economic slowdown.