The European Central Bank raised interest rates on Thursday, marking its second hike since the Iran war erupted in February, as policymakers respond to evidence that inflation is likely to remain considerably above the 2% target for an extended period.

The deposit rate was increased by 25 basis points to 2.5%, aligning with the forecasts of nearly all economists surveyed by Bloomberg. The ECB reiterated that it will not pre-commit to future policy moves, instead opting to decide meeting-by-meeting based on incoming data.

In its statement, the central bank noted that the Middle East conflict continues to generate inflationary pressures, with price growth expected to stay significantly above target for some time. It added that the outlook remains highly uncertain, with inflation risks tilted to the upside while risks to economic growth lean to the downside.

Thursday's decision means euro-area policymakers remain ahead of other major central banks in tackling the fastest inflation in nearly three years, driven primarily by surging energy costs. Traders anticipate further tightening, with market pricing suggesting two additional rate increases by mid-2027.