FRANKFURT, June 11 (Reuters) - The European Central Bank raised interest rates as expected on Thursday, hoping to prevent an Iran war-induced surge in energy prices from broadening out into higher inflation.
Surging costs for oil and gas helped push inflation across the 21-nation euro zone above 3% last month, far exceeding the ECB's 2% target, and further increases are almost certain as the conflict lasts longer than most had predicted.
That is why the ECB has long signalled Thursday's rate hike, making clear to firms and households it would not tolerate a rise in longer-term price expectations.
"The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area," the ECB said in a statement.
The rate hike came as the ECB raised its 2026 inflation projection to 3.0% this year from 2.6% seen in March, and lifted the 2027 outlook to 2.3% from 2.0%.
While financial investors see two more rate hikes over the coming year on the deteriorating price outlook, policy tightening is likely to be cautious and gentle as the bloc's economy is already stuttering and sharply higher borrowing costs would increase the risk of a recession.
The ECB lowered its 2026 economic growth projection to 0.8% on Thursday from 0.9% three months ago and sees growth of just 1.2% next year, indicating it must walk a narrow path, tempering price expectations without suffocating economic growth.
"The outlook remains uncertain, with upside risks for inflation and downside risks for economic growth," the ECB said.
With Thursday's hike, the ECB's benchmark deposit rate increases to 2.25% while the refinancing rate rises to 2.4%.
Attention now turns to the 1245 GMT press conference of ECB President Christine Lagarde and newly inaugurated Vice President Boris Vujcic.
Reporting by Balazs Koranyi; Editing by Catherine Evans
