The European Central Bank (ECB) is poised to raise interest rates, marking the first such action since September 2023. This decision comes in response to inflation driven by disruptions in energy supplies due to the ongoing conflict in the Middle East.

Policymakers, responsible for setting interest rates in the 21 euro-using countries, are expected to increase the key rate by 0.25 percentage points, reaching 2.25%. This move represents the first rate hike by the bank since 2023.

The rate increase is seen as a critical measure to tackle economic challenges resulting from the closure of the Strait of Hormuz, a vital route for energy and other goods, for over three months. In May, eurozone inflation stood at 3.2%, largely due to elevated energy costs, significantly surpassing the ECB’s 2% target. Prior to the conflict, inflation was slightly below 2%.

Frederik Ducrozet, head of strategy and macro research at Pictet Wealth Management, stated that significant short-term inflationary damage has already occurred. He noted that even with the eventual reopening of the strait, energy supply issues will remain, leading to persistent inflationary risks.

Increased costs for energy, fertilizers, and other goods exported via the Persian Gulf are contributing to global inflation. These rising costs are negatively impacting economic growth, compelling central bankers to carefully weigh the risks of prolonged inflation against the potential for economic slowdown.