Europe's economy is shrinking. Its central bank just raised rates anyway.
The European Central Bank lifted rates for the first time in nearly three years. Within hours, the IMF said it should do even more.
For most of 2025, the bank was cutting rates. It wanted to prop up slow growth.
That plan is now gone. Prices are climbing again.
Eurozone inflation hit 3.2% in May. That is the highest reading since 2023.
Energy did most of the damage. Oil and gas costs jumped nearly 11% as the Iran war squeezed supply.
The war is the root of it. Energy shocks tend to spread into the wider economy.
It is not just energy anymore. Core prices, which strip out food and fuel, rose to 2.5% in May.
So the bank raised its deposit rate by a quarter point, to 2.25%. That rate sets the floor for borrowing across the area.
It also lifted its main refinancing rate to 2.4%. The move makes money cost more across the bloc.
Rates had been falling for a while. The last hike was back in September 2023, when they peaked at 4.0%.
We explain what moves like this mean for your money, minus the jargon, in Market Briefs - five minutes each morning, plus a free investing masterclass when you join.
Raising rates works like tapping the brakes. It cools hot prices, but it slows the rest of the economy too.
And Europe is already limping. Output shrank 0.2% in the first three months of the year.
That mix has a name: stagflation. It means weak growth and high prices at the same time.
Pile higher rates on top, and the risk of a recession climbs. That is the bind in one line.
Raise rates and you may trigger a slump. Sit still and prices dig in deeper.
For savers, higher rates can help. For borrowers, the cost of new loans goes up.
Mortgages feel it fast. So do loans for cars and businesses.
Households feel both ends. Prices bite now, and loans cost more on top.
The IMF then picked a side. The policy rate "will need to rise" to keep the shock from spreading, it said.
Investors are betting this is not a one-off. Markets see about a 50% chance of another hike in September.
More could follow after that. Full-year growth is now seen near 0.8%.
Energy is the wild card. If the war eases, prices could cool on their own.
Banks may gain from wider margins. Builders and big borrowers may feel the squeeze.
The euro could firm up too. Higher rates often pull in foreign cash.
The bank meets again in the fall. Every word from it will move markets.
One thing is clear. Europe's easy-money era is over for now.
The bank is tapping the brakes on an economy that is already slowing. The IMF wants it to press down harder.
Want central bank news in plain English every morning? Join Market Briefs here and a 45-minute investing course comes with the sign-up.
