The European Central Bank raised its three key policy rates by 25 basis points, lifting the deposit facility rate to 2.50%, marking the second rate hike in 2026. The ECB also revised upward inflation forecasts for this year and next. President Christine Lagarde warned that geopolitical conflicts in the Middle East bring upside risks to energy prices, inflation proves stickier than previous estimates, and another rate hike as soon as October remains on the table.

Recurring inflation in the Eurozone mainly stems from rebounding energy costs and rigid service prices. Even though European manufacturing recovers slowly, higher imported energy costs keep passing through to household consumption. The rate decision triggered internal disagreement among policymakers. Some board members worry sustained hikes will weigh on the fragile economic recovery and increase debt repayment burdens for businesses and households.

In foreign exchange markets, the rate announcement offered temporary support for the euro. Analysts argue the Eurozone’s weak economic fundamentals suggest the hiking cycle is nearing its end, leaving limited room for further increases. A sharp surge in energy prices may reignite inflation and force the central bank to keep monetary policy tight. Globally, ECB tightening combined with hotter-than-expected US PPI data makes major central banks more likely to delay rate cuts. Chinese exporters should watch for risks of weaker export orders caused by soft Eurozone demand. Market participants will follow monthly Eurozone CPI, subsequent ECB meeting decisions and European manufacturing PMI figures.