Closing post
Time to wrap up….
The European Central Bank has raised interest rates for the first time since 2023 in response to higher inflation caused by the war in Iran.
The ECB raised its main deposit rate from 2% to 2.25% in a move that financial markets expect to be the first of three rises by next spring.
Eurozone consumer price inflation rose to 3.2% in May 2026, from 3% in April, sparking concerns that the conflict in the Middle East will force manufacturers and retailers to push through price increases into the summer and autumn to maintain profit levels. The ECB’s inflation target is 2%.
The ECB’s president, Christine Lagarde, said the outlook for inflation and the broader economy was uncertain while the war in Iran continued to push energy costs higher.
She said:
“The full implication of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects”.
And in other news:
Denmark's central bank raises interest rate in line with ECB
The ECB’s decision has had a knock-on impact in Copenhagen.
Denmark’s central bank has raised its key interest rate by 25 basis points to 1.85% on Thursday, saying:
“The interest rate increase is a consequence of the increase by the European Central Bank of its main monetary policy rate, the deposit facility rate, by 0.25 percentage point.
“Thereby, the monetary policy spread vis-à-vis the euro area will remain unchanged.”
Global growth is slowing to lowest level since pandemic, says World Bank
While Lagarde was speaking, the World Bank warned that global economic growth will slow to 2.5% this year as a result of the war in the Middle East – the weakest since the Covid pandemic – as inflation and borrowing costs rise.
The Washington-based development bank has downgraded growth forecasts for two-thirds of countries in its half-yearly Global Economic Prospects report. The bank estimated that global growth was 2.7% in 2025.
Even if the disruption to oil flows in the strait of Hormuz shipping channel triggered by the Iran war abates next month, the World Bank expects global inflation to rise to 4% in 2026, up significantly from 3.3% in 2025.
Average fertiliser prices are expected to jump by as much as 38% this year, as a result of disruption of supplies through the strait, and shortages of the inputs for fertiliser production from the Gulf.
Economists predict more ECB hikes ahead
With the ECB’s press conference over, several economists are warning that today’s rate hike may not be the last we see in 2026.
Here’s some early reaction to the first rise in eurozone interest rates in almost three years:
Holger Schmieding, chief economist at Berenberg:
A modestly hawkish message: Upon delivering the expected 25bp rate hike today, the European Central Bank (ECB) did not answer the key question: will it make a follow-up mistake by tightening the monetary screws again in July or September? As expected, the ECB emphasised that the outlook remains uncertain and that it will follow a “data-dependent meeting-by-meeting approach” and is “not pre-committing to any particular rate path”.
However, the significant upward revision to the call for core inflation in 2027 from 2.2% to 2.5% relative to very modest cuts to its staff projections for growth by 0.1ppt each for 2026 (to 0.8%) and 2027 (to 1.2%) sends a hawkish message.
That today’s decision to raise rates today was unanimous, as ECB president Christine Lagarde explained at the press conference, also indicates a clear risk that the ECB will tighten policy again in coming months.
Alex Nairn, economist at the Centre for Economics and Business Research:
The ECB hopes to prevent price pressures from becoming more entrenched and to contain their pass-through into other sectors of the economy as much as is possible. The rate increase was accompanied by an upward revision to the ECB’s inflation forecast for 2026 and 2027 and a downward revision to the growth outlook. Looking ahead, the ECB is expected to maintain a data-dependent approach with future policy decisions guided by inflation dynamics and the broader economic outlook. We expect further tightening may be required this year, although the timing of any additional rate increases remains uncertain”
Neil Birrell, CIO of Premier Miton:
The ECB delivered its first interest rate increase since 2023; unsurprising given the inflation backdrop and their own rising forecasts for this year and next. More encouragingly, they don’t see much risk to GDP, although growth expectations are already muted. This is likely to be followed by more rate hikes this year, depending on the data, but it’s hard to think this is the end of the policy move.
Updated
Christine Lagarde also touched on AI, pointing to the “new, faster, more intuitive developments” taking place.
This is creating security worries, she points out, explaining that the ECB is taking steps to ensure it is safe from potential intrusion and potential hacking attacks.
[Reminder, there are concerns that Anthropic’s Mythos AI tool is an unprecedented risk because of its ability to expose flaws in IT systems.]
Q: What would it take for the ECB to reverse today’s interest rate rise?
“We will be deciding meeting by meeting, we will be data dependent, we will have no preset predetermined rate path going forward. That’s the way we will be operating,” Christine Lagarde replies.
Q: The ECB’s monetary policy statement no longer says that longer term inflation expectations remain well anchored. Has your view changed?
Christine Lagarde says short term inflation expectations have risen on, but longer term expectations look to be broadly anchored at the ECB’s 2% target.
Lagarde: This is a good decision
Earlier in the press conference, Christine Lagarde rejected suggestions that the ECB might make an “insurance” interest rate hike.
That prompts a teasing question …
Q: If it’s not an insurance hike, what is it then? Is it the start of a new hiking cycle or something else?
Lagarde tries to sweep this aside, calling today’s rate rise “a good monetary policy, interest rate decision”.
She insists it is a “sensible monetary policy decision … that stands”.
Updated
Christine Lagarde then insists that the ECB has not been complacent in its handling of the eurozone economy.
“I don’t like to brag and I’m not full of vanity,” she insists, before pointing out that the ECB had kept inflation near its 2% target for the last 12 months (before the Iran war pushed up costs).
“We have not been complacent, we have done our job.”
Lagarde: A bank's gotta do ...
Q: Quite a few economists had warned that an interest rate rise today would be a mistake – what’s your response?
Christine Lagarde replies that “everybody has to do what they have to do”.
The ECB’s job is price stability, she points out, and to follow its reaction function [how it adjusts monetary policy in response to evolving economic conditions].
She then cites the inflation outlook, and the risks to the upside on inflation, to defend today’s interest rate hike.
Updated
Lagarde: decision was unanimous
On to questions!
Q: Did the ECB’s governing council consider holding interest rates today, or consider a larger increase in rates?
Lagarde (who appears to be sporting a starfish brooch) reveals that the decision to raise rates by a quarter-point was unanimous, and based on the latest forecast from ECB economists.
She says:
The decision that we took today to raise, by 25 basis points, our three interest rates was a unanimous decision without reservation.
We did not discuss or debate any other alternative proposal.
Updated
Lagarde: The risks to the growth outlook are to the downside, due to Middle East war
European Central bank president Christine Lagarde then warns that the ongoing Iran war is threatening the eurozone’s growth outlook.
“The risks to the growth outlook are to the downside, mainly owing to the war in the Middle East, which has added to the volatile global policy environment. Prolonged disruption of energy supplies could increase energy prices further and for longer than currently expected,” Lagarde tells reporters in Frankfurt.
These factors would erode real incomes, and make firms and households more reluctant to invest and spend, she warns.
And the situation could worsen, she warns, if European companies are hit by shortages due to supply chain disruption.
Lagarde says:
The drag on growth would intensify if the closure of major shipping routes were to cause acute shortages of key inputs that forced euro area firms to curtail output.
A worsening of global financial market sentiment, or a tighter supply of credit, could company demand. Additional frictions in international trade could also further disrupt supply chain, reduce exports, and weaken consumption and investment.
Updated
On the economic situation, Christine Lagarde argues that the euro area economy grew in the first quarter if you adjust for a temporary factor in Ireland.
That “temporary factor” is that Ireland’s GDP shrank by 12% (!) in the last quarter, due to a plunge in activity at its multinational companies.
That pulled the eurozone into an official contraction in the first three months of 2026, but yet the picture is better if you exclude Irish GDP (and GDP is not a good measure of Ireland’s economy).
Lagarde then insists that the ECB is “not pre committing to a particular rate path”.
She says:
In particular, our interest rate decisions will be based on our assessment of inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission.
Christine Lagarde then warns that the outlook for the eurozone remains uncertain, with upside risks for inflation and downside risks for economic growth.
She tells reporters in Frankfurt:
The full implication of the war for medium term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second round effects.
Lagarde: The war in the Middle East is generating inflation pressures
ECB president Christine Lagarde is holding a press conference now to explain today’s interest rate hike.
Lagarde begins by warning that the Iran war is creating inflation pressures in the euro area.
The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at our 2% target in the medium term.
In line with this commitment, we today decided to raise the three key ECB interest rates by 25 basis points. 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.
Lagarde then outlines how the ECB’s economists have raised their inflation forecasts, and cut their prediction for growth (as covered earlier in this blog).
Today’s interest rate hike from the ECB won’t be the last this year, predicts Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK:
As expected, the ECB hiked rates by 25bps today. The next move will depend on how energy prices evolve over the summer, but the risks are clearly skewed to another rate hike later this year. However, a weaker labour market and soft economy will limit second-round effects and reduce the need for further tightening.
Given inflation has already jumped to 3.2% in May and there is growing evidence of further inflation in the pipeline with PPI surging from -3.0% in February to 4.9% in April, today’s rate hike was inevitable. In addition, the updated forecasts show the ECB expects core inflation to average 2.5% this year and next, up from 2.3% and 2.2% respectively.
Updated
Today’s rate hike makes the ECB the first G7 central bank to raise interest rates in response to the Iran war.
The US Federal Reserve, the Bank of England, and the Bank of Japan, all meet next week. The BoJ is expected to raise rates, while the BoE and the Fed probably won’t….
Eurozone growth forecasts lowered
Disappointingly, the ECB has lowered its forecast for growth in the euro area.
Its baseline forecasts now show economic growth at an average of 0.8% in 2026, 1.2% in 2027 and 1.5% in 2028.
The bank says:
This is a downward revision for 2026 and 2027, reflecting a more pronounced impact of the war on commodity markets, real incomes and confidence.
In March, the ECB had expected growth to average 0.9% in 2026, 1.3% in 2027 and 1.4% in 2028.
ECB raises inflation forecast
The ECB has also rised its forecasts for inflation, due to the knock-on impact of the Iran war on energy prices.
Headline inflation is now expected to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028.
Back in March, the ECB had forecast inflation would be 2.6% in 2026, 2.0% in 2027 and 2.1% in 2028.
The ECB explains:
Compared with March, staff have revised up their baseline projection for inflation in 2026 and 2027 owing to a higher path for energy prices, which, to some extent, is expected to feed into food, goods and services inflation.
Updated
ECB raises eurozone interest rates by 25 basis points
Newsflash: the European Central Bank has increased borrowing costs across the eurozone for the first time since September 2023.
The ECB’s governing council voted to increase interest rates by a quarter of one percentage point.
Policymakers hiked borrowing costs after eurozone inflation rose to 3.2% last month, as the Middle East crisis pushed up energy costs.
Announcing the decision, the ECB says:
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.
This increases the rate on the ECB’s deposit facility, which banks can use to make overnight deposits with the Eurosystem, to 2.25% up from 2%.
The interest rate on the ECB’s main refinancing operations, which commercial banks use to borrow funds from the ECB, is going up to 2.4% from 2.15%.
And the rate on the marginal lending facility, which offers overnight credit to banks, rises to 2.65% from 2.4%.
ECB expected to raise interest rates shortly
The eurozone is bracing for its first interest rate rise since 2023, as the European Central Bank prepares to set borrowing costs across the single currency region.
The ECB is expected to increase eurozone interest rates by a quarter of one percentage point today, to combat inflationary pressures from the Iran war.
Eurozone inflation rose to 3.2% last month, further above the ECB’s target of 2%, putting pressure on policymakers to tighten policy – even though costs are being driven up by external factors beyond the EBC’s control.
Kathleen Brooks, research director at XTB, explains:
The fear is that the ECB could make the same mistake as it did in 2011, when it hiked rates right before the sovereign debt crisis. Today’s hike could exacerbate the growth issues in the currency bloc, and that could weigh on the ECB’s credibility, something that [ECB president Christine] Lagarde and co will want to avoid.
There is a growing chorus that this rate hike won’t bring down inflation, which is caused by an international energy supply crunch. Due to this, Lagarde may want to deliver as neutral a message as possible later today, and the bar is high for Lagarde to deliver a hawkish surprise.
The ECB’s decision is due at 2.15pm in Frankfurt, or 1.15pm UK time, followed by a press conference 30 minutes later.
Back in the airline sector, Wizz Air has reported a slump in profits after the Iran war hit its earnings.
Wizz’s operating profits shrank by 16.6% to $139.7bn in the year to 31 March, with net profits shrinking by over 99%, despite transporting 10% more passengers than a year before.
Wizz told shareholders it had faced a number of “one-off headwinds” in the last year,including the forced cancellation of Tel Aviv and other Middle East routes during the 2025 peak summer period as well as the cancellation of Middle East and Cyprus routes in March 2026.
The Iran conflict in March 2026 knocked €50m off its earnings, but this was “largely mitigated by fuel hedges put in place prior to the conflict”, it says.
Wizz declined to give any forecasts for the current year, citing the lack of visibility about how events will develop, uncertainty related to the ongoing conflict in Iran and the closure of the strait of Hormuz. Shares are up 6.7% this morning, though.
FTSE 100 up and oil down despite latest Middle East strikes
The financial markets are surprisingly calm this morning, as conflict erupts again in the Middle East.
European stock markets are mostly higher this morning, while the oil price is now slipping back.
Today, the US has launched a second round of airstrikes on Iran, prompting Tehran to respond by targeting Bahrain, Kuwait and Jordan.
Brent crude oil did jump overnight to as high as $95.50 a barrel, but it’s now slipped back to $92.25, down almost 1% today.
And Britain’s FTSE 100 share index is now up 0.55%, or 56 points, at 10,311 points.
AJ Bell investment director Russ Mould, explains:
As has often been the case during the Iran conflict, the UK’s flagship index has found support from its collection of energy companies and more traditionally defensive names. Miners and other China-linked stocks were lifted by data suggesting the country is investing heavily in AI and consuming raw materials at a healthy rate.
Selling in AI-related stocks, of which London has very few, put shares on Wall Street under pressure yesterday and that’s extended to Asia today.
Oil prices remained steady despite the apparent unravelling of the US-Iran ceasefire. That is partly helped by sluggish demand from China with imports falling as the country relies on its own stockpiles and expands its use of alternative energy.
Updated
Over in Frankfurt, shares in Hugo Boss have jumped by over 7% after UK retail magnate Mike Ashley launched a takeover bid.
Ashley’s Frasers Group, which owns 26% of Hugo Boss, said last night it is offering to pay about €1.98bn (£1.73bn) for the remainder of the business to take full control.
Victoria Scholar, Head of Investment at interactive investor, says:
The offer of 38 euros a share, is equivalent to a 4.3% premium to yesterday’s closing price. Hugo Boss shares have jumped over 6% to a premium to the offer price at around 38.8 euros, suggesting that investors believe an improved offer or a rival bid could emerge with the former of the two looking more likely.
Frasers Group has a long history of building up stakes in struggling retailers over time, with several UK acquisitions bought out of administration. Hugo Boss’s share price has declined in recent years, down almost 50% from its 2023 highs, suffering since the post-pandemic boom. However the difference this time is that Hugo Boss is a German brand, with a strong global reputation that has been delivering improved results lately thanks to a fruitful turnaround plan, although sales and profits still fell in the first quarter highlighting how there is still a lot of work to do.
Updated
UK potential redundancies up 59%
Elsewhere this morning, the number of workers facing redundancy has jumped.
New data from the Insolvency Service shows that the number of potential redundancies reported in the last week of May was 59% higher than a year ago.
However, it did also decrease by 12% compared with the previous week.
In Jingye’s statement, it also hopes the UK government will fully safeguard the legitimate rights and interests of Jingye and other Chinese companies as well as global investors.
China’s Jingye Steel asks UK for compensation for British Steel takeover
China’s Jingye Steel is seeking compensation from the UK government over the takeover, and future nationalisation, of British Steel.
Jingye Steel wants Britain to compensate it for the loss incurred through its investment in British Steel, which the UK government took operational control of in April 2025.
In a statement on WeChat, the company says:
“Jingye has recently initiated consultation procedures under the bilateral investment treaty with the UK government.”
Last month’s King’s Speech included plans for a Steel Industry (Nationalisation) Bill, to safeguard the domestic production of steel.
Jingye bought British Steel out of receivership in 2020, but in 2025 it announced it would shut the steelworks at Scunthorpe, prompting Starmer to step in to seize control.
Jingye then began trying to recover hundreds of millions of pounds of loans it had made to the company, as well as compensation for the cost of upgrading British Steel’s equipment.
Elsewhere in the travel world, Heathrow has reported a drop in passengers in May as the Middle East crisis hits demand.
May passenger numbers at Heathrow were down by 1.2% year-on-year last month, with more than 7.1 million people travelling through the airport. That includes a 1.9% drop in UK passenger numbers.
Ryanair blasts 'bogus' investigation
Ryanair has responded to the CMA’s investigation into its child/adult seating policy, calling it ‘false’ and ‘bogus’.
The airline points out that it doesn’t charge children to sit with their parents and insisting it is complying with the law.
Here’s the statement:
Ryanair’s family seating policy fully complies with all relevant laws and regulations and saves families money when travelling on the UK’s lowest fare airline.
Ryanair DOES NOT charge any fee for children to sit beside their parent or accompanying adult. Like all adults who select a reserved seat, adults travelling with children pay one reserved seat fee, but can select reserved seats beside them for up to 4 children on the same booking FREE OF CHARGE. This means that parents travelling with children pay for only one (adult) reserved seat but pay nothing for the 4 other reserved seats for their children travelling with them.
This bogus CMA investigation is a failed effort by the Starmer Govt to pretend it cares about consumers when it has failed to abolish APD which would immediately deliver lower fares for all consumers and growth for the UK aviation, tourism and wider economy.
Ryanair looks forward to disproving these false CMA claims during this bogus investigation.
Updated
Ryanair's family seat policy
You can see Ryanair’s Family Seat Policy online here.
It explains that up to four under-12s in a group can get a reserved seat for free – as long as they’re with an adult who has bought a reserved seat (for around £8, the CMA says).
The policy says:
For safety reasons, children under the age of 12 must sit beside an accompanying adult, and infants (aged 8 days to 23 months inclusive) must sit on an accompanying adult’s lap.
It is mandatory for an adult travelling with children under 12 (excl. infants) to reserve a seat. A maximum of four children for every one adult on the same booking will receive a reserved seat free of charge. This ensures parents of young children sit together during the flight. This will also allow you to check-in for your flight 60 days before departure. It is not mandatory for any other adults or teenagers in the booking to reserve a seat, however they may choose to do so if they wish to seat with the rest of the family.
Hayley Fletcher, the CMA’s senior director of consumer protection, explains why the regulator is concerned about Ryanair’s pricing:
Lots of families save up to afford a summer holiday and we know that extra charges can quickly bump up the price.
Our investigation will consider Ryanair’s approach to family seat reservations and how the cost is presented to consumers to determine whether they comply with consumer law.
For the past year, we’ve told businesses to ensure their customers are shown the total price upfront – those who don’t face the very real possibility of action from the CMA.
Updated
Introduction: Ryanair's fees to seat parents with children under investigation
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Budget airline Ryanair is facing an investigation of the charges that parents must pay to sit with their children on flights.
Britain’s competition authority is investigating whether Ryanair is imposing an unfair contract term under consumer law, by insisting that parents (or indeed any adult) pay £8 for a reserved seat, to guarantee that their children sit with them.
The CMA says this morning:
Ryanair’s terms and conditions require at least one parent to sit with their children aged 2-11 when they fly. This is done through what Ryanair calls a “mandatory family seat”, which the parent must pay for in order to secure a seat next to them for their child.
For all other passengers, reserving a seat is optional. This fee applies to both outbound and return flights and typically costs around £8 each way. CMA evidence suggests this approach to seating is used across the majority of Ryanair’s UK routes.
The investigation will examing whether parents are being unfairly charged for Ryanair to meet its child safety and disability‑related obligations as set out under aviation rules.
The CMA suggests that Ryanair is the only major airline flying out of the UK to impose this charge; others will seat children with a parent or guardian without the need for a paid-for adult seat reservation, or allocate seats together automatically for free during the booking process.
The regulator will also look into whether this is an example of ‘drip’ pricing, where extra charges pop up during a booking process.
The agenda
-
Noon BST: Turkey interest rate decision
-
1.15pm BST: European Central Bank interest rate decision
-
1.30pm BST: US weekly jobless claims
-
1.45pm BST: European Central Bank press conference
Updated
