The European Central Bank raised interest rates again Thursday as the eurozone absorbs a new energy shock and inflation moves further above target.

Its Governing Council lifted the deposit facility rate from 2.25% to 2.5%, marking the second increase since June 11. The main refinancing rate rose to 2.65%, while the marginal lending facility increased to 2.9%.

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Energy Drives Higher Inflation

In its statement, the ECB said the conflict in the Middle East continues to push inflation higher and warned that price pressures could remain above target for an extended period.

Eurozone inflation rose to 3.3% in August from 2.9% in July, reaching its highest level since September 2023. Energy inflation jumped to 14.3% from 10.3% as tensions around the Strait of Hormuz constrained crude supplies, while Brent crude moved above $100 a barrel.

Underlying pressures remained more contained. Core inflation eased to 2.4% from 2.5%, while services inflation fell to 3% from 3.3%, providing limited evidence that higher energy costs are spreading across the wider economy.

ECB Sees A Different Inflation Shock

ECB economists estimated earlier this month that adverse energy supply factors accounted for about 90% of the increase in energy inflation between January and May. Their analysis found that demand and public policy stimulus played smaller roles in the latest increase.

That differs from the 2021-22 inflation surge, when broader price pressures prompted central banks to pursue much more aggressive rate increases.

Inflation also varies significantly across the eurozone. Spain recorded 4.5% in August, compared with 2.9% in Germany and 2.7% in France, showing how differently energy costs are feeding into domestic prices.

Further Rate Hikes Remain Possible

Economic growth has remained relatively resilient, but there is little evidence of widespread overheating. Even after Thursday’s increase, the deposit rate remains within the ECB’s estimated neutral range.

ECB President Christine Lagarde had signaled in July that another increase was possible, saying the “burden of proof is on data” and that the full impact of the energy shock had yet to emerge.

Updated ECB projections accompanied Thursday’s decision, although their cutoff date was about two weeks before the meeting. Recent oil price increases and European government bond yields reaching 15-year highs are therefore not fully reflected in the forecasts.

Global Central Banks Prepare Their Decisions

Attention now turns to other major central banks. The Federal Reserve is due to decide on Sept. 16, followed by the Bank of Japan on Sept. 18, while the Bank of England is expected to hold its rate at 3.75% on Sept. 17.