The ECB has raised interest rates for the first time in three years. As anticipated, the three key policy rates were increased by 25 basis points.

Confronted by the return of inflation since the onset of the war in Iran, the ECB is the first of the major central banks to take this step. Next week, the Bank of Japan is expected to follow suit, while the Bank of England and the Fed are projected to hold rates steady.

The ECB also released its latest economic projections. Unsurprisingly, it now expects lower growth and higher inflation than it did in March. Headline inflation in the eurozone is projected to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028. Furthermore, the ECB's baseline scenario anticipates average economic growth of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028 within the eurozone. These forecasts reflect the lingering effects of a prolonged energy shock.

Today's announced rate hike came as a surprise to no one. In fact, Christine Lagarde emphasized the unanimous nature of the decision.

Many observers are describing this as an "insurance" rate hike. In other words, the ECB is raising rates by 25 basis points to signal its commitment to the fight against inflation. This is, above all, a matter of credibility.

However, during her press conference, Christine Lagarde repeatedly rejected this characterization. Nevertheless, that is precisely what is at stake, as the ECB has not committed to any further rate hikes. The official statement reiterates that there is no predefined path for rates and that decisions will be made on a "meeting-by-meeting" basis.

Faced with rising inflation, the ECB felt compelled to raise rates, even at the risk of further weighing on growth. It is worth noting that, unlike the Fed, the ECB operates under a single mandate, which traditionally gives it a more hawkish bias.

While a 25-basis-point hike will not be enough to break economic momentum, one might question the necessity of further monetary tightening in Europe. First, market interest rates have already risen sharply, contributing to a tightening of financial conditions and effectively doing some of the ECB's work for it.

Second, we are facing a supply shock. "Unless I am gravely mistaken, raising policy rates will not reopen the Strait of Hormuz!" summarizes Frederik Ducrozet, Chief Economist at Pictet Wealth Management. Given the weakness of demand in the eurozone, there is also no guarantee that rising energy prices will spread broadly to the rest of the economy.