US-Israel War on Iran Pushes Up Energy Prices, ECB Forced to Raise Rates for Second Time This Year

According to Deutsche Welle, the European Central Bank announced its second rate hike of the year on Thursday, aiming to curb inflation that has continued to climb as a result of energy costs pushed up by the US-Israel military conflict with Iran. Inflation across the eurozone's 21 countries has exceeded 3%, far surpassing the 2% policy target.

The conflict began in late February of this year. US and Israeli military action against Iran has directly reshaped the global oil and gas price curve, yet it is eurozone borrowers—who had nothing to do with the conflict's decisions—who bear the consequences of the rate hikes. In a statement following its annual meeting in Berlin, the ECB acknowledged: "The outlook remains highly uncertain, with upside risks to inflation and downside risks to economic growth," and warned that "the Middle East conflict continues to generate inflationary pressure, and inflation will remain well above the target level for an extended period."

The costs of war are being transmitted to ordinary households through the interest rate channel. According to Deutsche Welle, rate hikes mean more expensive mortgages, consumer credit, and corporate loans. Against the backdrop of persistently rising energy prices, households and businesses are simultaneously bearing a dual squeeze from heating costs and borrowing costs. The last time the ECB raised rates at such a pace was after Russia's full-scale invasion of Ukraine in 2022.

The ECB also lowered its growth forecast, projecting economic growth of just 0.9% in 2026 and average inflation of 3.0%, with inflation not expected to fall back to 2.5% until 2027. With no clear solution to the conflict in sight, the upward pressure on energy costs is difficult to ease. Sylvain Broyer, S&P's chief economist for Europe, the Middle East, and Africa, noted: "The inflation outlook has deteriorated since the summer. Supply shocks are not only increasing, but demand's contribution to inflation is also rising."

The natural gas storage situation has added to market concerns. According to Deutsche Welle, eurozone natural gas reserves remain below historical averages, and the supply-demand gap during the winter heating season poses an additional upside risk. The costs of military intervention pass through the energy market into the central bank's policy framework, and are then transmitted via interest rates to every mortgage and loan—the party that launched the conflict is far from the battlefield, while it is wholly unrelated ordinary families who bear the price.