The European Central Bank raised its key interest rate by a quarter of a percentage point to 2.5 percent on Thursday, marking the second increase this year for the institution that sets monetary policy across the 20 countries that use the euro. The move follows a period in which energy prices have climbed steadily on the back of an extended period of tension in the Middle East.
Along with the rate decision, the ECB lifted its projection for economic growth across the euro area this year to 0.9 percent, up slightly from an earlier estimate of 0.8 percent. At the same time, the bank now expects inflation to average 3.0 percent this year, before easing to 2.5 percent in 2027. Those figures remain above the ECB's longstanding target of 2 percent inflation over the medium term.
Europe's economies tend to be more exposed to swings in oil prices than the United States, in part because the region imports a larger share of its energy. That means the recent run up in Brent crude, which has climbed from below $72 a barrel in early July to above $107 this week, feeds relatively quickly into household energy bills and business costs across the continent, a dynamic that central bankers in Frankfurt are watching closely.
The decision places the ECB in a similar position to the U.S. Federal Reserve, which is weighing its own rate decision at a meeting scheduled for September 15 and 16. Both institutions are contending with a period in which energy costs, rather than the more traditional drivers of inflation such as wage growth or consumer demand, are the primary source of price pressure.
Analysts will be watching whether other central banks, including in the United Kingdom and across emerging markets that import a large share of their energy, follow with similar moves in the coming weeks.
Why is Europe raising rates while the U.S. is only considering it?
Europe's economy is generally more exposed to swings in energy prices because it imports more of its oil and gas, so rising crude costs have shown up more directly in its inflation figures.