ECB expected to raise rates as borrowing costs rise across the eurozone

The European Central Bank is expected to announce a 0.25 percentage point rise in its main interest rate on Thursday, taking it to 2.25%. The move would be the first increase since 2022 and would mark a further shift in the bank's response to inflation pressures. It would also feed through quickly to borrowing costs for households and businesses across the eurozone.

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Christine Lagarde, the ECB president, is expected to set out the decision at the bank's regular policy announcement. The rise is being linked to higher oil costs, which have added to the cost of living and strengthened expectations that the central bank will tighten policy further. Observers quoted in the supplied material believe another increase could follow later this year, possibly in September.

The immediate impact is expected to be felt most clearly in Ireland, where about 110,000 tracker mortgage customers would see repayments rise. The supplied material says a 0.25% increase on a €300,000 loan over 25 years would add about €37 a month to repayments. It also says fixed-rate loans are likely to become more expensive over time, affecting new borrowers and people coming to the end of existing fixed deals.

The decision matters because the ECB's main task is to keep inflation close to 2%, while the supplied material says eurozone inflation is running at 3.2%. In Ireland, inflation was estimated at 3.5% in May. That gap helps explain why the bank is under pressure to act, even though higher rates can make mortgages, loans and other forms of credit more expensive for consumers and firms.

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The expected increase comes after a long period in which the ECB held rates steady following the energy price shock triggered by Russia's invasion of Ukraine. The supplied material also links the latest pressure to a jump in oil costs after the Iran war, suggesting that energy prices remain a central factor in the inflation outlook. For the ECB, the challenge is to slow price growth without adding too much strain to households already facing higher living costs.

In Ireland, the issue has a direct political and social dimension because fuel and mortgage costs affect household budgets quickly. The supplied material says rising fuel prices led to nationwide protests in April, prompting the government to temporarily lower excise on petrol and diesel. Those tax cuts are due to expire, which could leave consumers facing more pressure at the same time as borrowing costs rise.

What remains unclear is how far the ECB will go beyond this expected move and whether it will signal a longer tightening cycle. Markets will be watching Christine Lagarde's remarks for clues on the pace of any further increases and on how the bank judges inflation risks. The key question now is whether higher rates will be enough to cool prices without deepening the squeeze on borrowers and consumers.

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