The eurozone faces its first interest rate rise since September 2023, after the European Central Bank’s governing council voted to increase borrowing costs by a quarter of a percentage point in response to surging inflation fuelled by the Middle East conflict.
The rate on the ECB’s deposit facility – the benchmark for overnight bank deposits – rises to 2.25% from 2%. The main refinancing operations rate, used by commercial banks to borrow from the central bank, moves up to 2.4% from 2.15%, and the marginal lending facility rate, for overnight credit, increases to 2.65% from 2.4%.
The decision came after eurozone inflation hit 3.2% last month, well above the ECB’s 2% target and driven largely by the war in Iran and the disruption to oil shipments through the Strait of Hormuz. Announcing the move, the ECB said the conflict “is generating inflation pressures” and that the rate rise “is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area”.
Rate hike risks repeating 2011 mistake, analysts warn
The ECB has acted despite the fact that the cost pressures are overwhelmingly external – a consequence of an international energy supply crunch, not domestic demand. That has raised fears among economists that the central bank is repeating the error of 2011, when it raised rates just before the sovereign debt crisis tipped the bloc into recession.
Kathleen Brooks, research director at XTB, warned that “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”. She added that “there is a growing chorus that this rate hike won’t bring down inflation, which is caused by an international energy supply crunch”. As a result, Lagarde is expected to “deliver as neutral a message as possible” in her press conference, with a high bar for any hawkish surprise. The ECB also released updated macroeconomic projections, widely expected to show significant upward revisions to inflation forecasts for 2026 and 2027.
Wizz Air profits slump as Iran war cancels routes
The conflict has already bruised the aviation sector. Wizz Air reported a 16.6% drop in operating profit to €139.7 million for the year to 31 March, despite carrying a record 69.7 million passengers – 10% more than the previous year. Net profit fell by more than 99% after the airline was forced to cancel flights to Tel Aviv and other Middle Eastern destinations during the 2025 peak summer season, as well as services to the Middle East and Cyprus in March 2026.
The Iran war in March knocked €50 million off earnings, though Wizz said that was “largely mitigated by fuel hedges put in place prior to the conflict”. The carrier declined to give any guidance for the current financial year, citing “lack of visibility about how events will develop, uncertainty related to the ongoing conflict in Iran and the closure of the strait of Hormuz”. Despite the bleak outlook, Wizz Air shares rose 6.7% in morning trading.
Market calm masks geopolitical turmoil
Financial markets showed surprising composure. European stock indices were mostly higher, and the FTSE 100 climbed 0.55% to 10,311 points. Brent crude, which spiked overnight to $95.50 a barrel on news that the US had launched a second round of airstrikes on Iran – prompting Tehran to retaliate against Bahrain, Kuwait and Jordan – slipped back to $92.25, down nearly 1% on the day.
Russ Mould, investment director at AJ Bell, said the FTSE 100 had found support from energy companies and defensive stocks, while “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”. He noted that oil prices remained steady partly because of “sluggish demand from China with imports falling as the country relies on its own stockpiles and expands its use of alternative energy”.
Heathrow passenger numbers fall as Middle East demand evaporates
The conflict is also hitting Britain’s busiest airport. Heathrow reported a 1.2% year-on-year drop in passenger numbers in May, with just over 7.1 million travellers passing through. UK passenger numbers fell by 1.9%, while travellers from the Middle East plummeted 31%, although transfer passengers increased 10% as holidaymakers rerouted to avoid regional hubs. Heathrow recorded its busiest ever single day in May, but warned that proposed cuts to landing fees by the Civil Aviation Authority could harm its competitiveness.
Ryanair faces CMA investigation over family seating charges
Elsewhere in air travel, Ryanair is under investigation by the Competition and Markets Authority over its “mandatory family seat” policy. The CMA said Ryanair’s terms require at least one parent travelling with a child aged 2-11 to pay around £8 each way to reserve a seat next to them – a charge it believes no other major UK airline imposes. The regulator is examining whether this constitutes an unfair contract term under consumer law and whether the fees amount to unlawful “drip pricing”.
Ryanair hit back, calling the investigation “false” and “bogus”. It said its policy “fully complies with all relevant laws” and that adults pay only one reserved seat fee while up to four children under 12 can sit beside them for free. The airline accused the “Starmer Govt” of pretending to care about consumers while failing to abolish Air Passenger Duty. Hayley Fletcher, the CMA’s senior director of consumer protection, said the probe would consider “how the cost is presented to consumers to determine whether they comply with consumer law”.
Hugo Boss jumps on Mike Ashley takeover bid
Shares in German fashion house Hugo Boss surged more than 7% after UK retail magnate Mike Ashley’s Frasers Group launched a €1.98 billion (£1.73 billion) takeover offer for the 74% of the business it does not already own. Frasers, which holds a 26% stake, is offering €38 a share – a 4.3% premium to the previous close. Victoria Scholar, head of investment at interactive investor, said shares had already risen to around €38.80, “suggesting that investors believe an improved offer or a rival bid could emerge”. She noted that Hugo Boss shares are down nearly 50% from their 2023 highs, though a turnaround plan has delivered some improvement. Frasers expects to complete the deal in the second half of the year, subject to regulatory approvals.
Jingye Steel seeks compensation from UK government over British Steel nationalisation
Chinese-owned Jingye Steel has initiated formal consultation procedures under the UK-China bilateral investment treaty, demanding compensation for the losses it incurred after the British government took operational control of British Steel in April 2025. Jingye bought the company out of receivership in 2020, but announced plans to close its Scunthorpe steelworks last year, prompting a government takeover. The King’s Speech included a Steel Industry (Nationalisation) Bill to safeguard domestic production. Jingye said it had invested substantially and supported a green transition, but alleged that promised government support funding failed to materialise. The company is trying to recover hundreds of millions of pounds in loans and compensation for equipment upgrades.
UK redundancy warnings rise 59% year-on-year
New data from the Insolvency Service showed that the number of potential redundancies reported in the last week of May was 59% higher than the same period a year ago, although it fell 12% compared with the previous week.
