Central banks weigh rate rises as energy costs climb — ECB raised rate to 2.5%

The European Central Bank raised its policy rate to 2.5% this week, citing elevated inflation risks amid rising energy prices.

Oil has climbed, with Brent trading around $105 a barrel, and restrictions on shipments through the Strait of Hormuz tied to the US–Iran war have been highlighted as a driver of higher fuel and transport costs.

The US Federal Reserve and the Bank of England are due to decide on policy next week. The Fed has held its rate at 3.5%–3.75% for five meetings; with inflation at 3.4% and a strong jobs market, many market participants expect a rate increase. New Fed Chair Kevin Warsh has emphasised focusing on slowing price rises, which has reinforced expectations of tighter policy.

The Bank of England is widely expected to keep its rate at 3.75% despite forecasts of higher household energy bills this winter and UK gas prices rising above 200p per therm. Some economists argue there is not yet evidence of broad second-round effects such as widespread wage demands.

Forecasts vary: Deutsche Bank economists called a US rate hike “the most likely policy outcome,” while Grace Zwemmer of Oxford Economics expects rates to remain unchanged. President Donald Trump has again urged lower rates.

Central banks face a trade-off: raising rates can curb spending and inflation but may also restrain investment and hiring. Officials say near-term decisions will hinge on energy-price developments and labour-market indicators.