ECB raises interest rates by 25 basis points amid inflation concerns

Christine Lagarde, President of the ECB, and Boris Vujčić, Vice-President of the ECB, announced that the Governing Council has decided to raise the three key ECB interest rates by 25 basis points. This decision aims to ensure inflation stabilizes at the 2% medium-term target.

The decision follows inflation rising to 3.2% in May, driven by energy prices, with inflation excluding energy and food projected to average 2.5% in 2026 and 2027. Economic growth is expected to slow, with projections of 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028, reflecting the impact of the war and energy price shocks.

The outlook remains uncertain, with upside risks to inflation and downside risks to growth. The ECB will monitor incoming data and adopt a data-dependent, meeting-by-meeting approach for future policy decisions, without pre-committing to a specific rate path.

Economic activity in the euro area grew in the first quarter, supported by domestic demand and exports, but the war is weighing on activity, especially in services. The labour market remains resilient, with unemployment at 6.3% in April. Domestic demand is expected to weaken, but household balance sheets remain solid, supporting consumption.

Financial conditions are broadly unchanged but remain tighter than pre-war levels. Banks are resilient, supported by strong capital and liquidity ratios. Risks to financial stability include potential sharp asset price drops and geopolitical tensions.

The Governing Council emphasizes the importance of fiscal sustainability, structural reforms, and digital innovation, including the adoption of the digital euro, to support growth and stability in the euro area.

The full details of the decision are available in the official press release on the ECB website.