The European Central Bank just did something it hasn’t done since 2023: raise interest rates. On June 11, the ECB lifted its key rates by 25 basis points, a move that Governing Council member Primoz Dolenc called necessary to prevent inflation from running away amid escalating geopolitical tensions in the Middle East.

The decision pushes the deposit facility rate to 2.25%, the main refinancing rate to 2.40%, and the marginal lending rate to 2.65%, all effective June 17. For anyone who thought the ECB’s rate-cutting cycle was a one-way street, this is a sharp U-turn.

Why the ECB pulled the trigger now

Euro area headline inflation recently crossed above 3%, a number that makes central bankers deeply uncomfortable when their target is 2%. The primary culprit: energy prices, driven higher by the ongoing conflict in Iran that has disrupted supply chains and rattled global commodity markets.

ECB staff have revised their 2026 inflation projections upward to around 2.6%, reflecting the stubborn reality that energy price shocks don’t stay contained to your gas bill. They ripple outward. Food costs rise. Transportation gets more expensive. Wages start chasing prices.

Dolenc specifically flagged the risk of what economists call “second-round effects,” where an initial price shock in one sector spreads across the broader economy. The ECB decided it couldn’t afford to wait and watch that process unfold.

This wasn’t exactly a surprise move. Dolenc had warned back in April 2026 that a prolonged Iran conflict could force the ECB into earlier policy tightening than markets expected. Financial markets had largely priced in Thursday’s hike, suggesting traders were listening.

What markets are pricing in next

Markets are now anticipating two to three additional increases before the year is out. That’s a meaningful shift in the monetary policy landscape for the eurozone, and it carries consequences well beyond Frankfurt.

Rising rates increase borrowing costs across the board. Mortgages get more expensive. Corporate debt becomes costlier to service. For businesses that loaded up on cheap financing during the ECB’s cutting cycle, this is an unwelcome development. The economic growth outlook for the eurozone, already fragile, faces additional headwinds.