The European Central Bank's decision to raise its key interest rate is reflecting the increasingly complex economic situation, underpinned by soaring inflation and energy prices as a result of the US-Iran war, analysts have said.
And analysts believe it is also an effort to repeat its mistakes from as far back as a decade and a half ago.
The ECB hiked its benchmark deposit rate by a quarter of a percentage point on Thursday to 2.25 per cent, its first increase in about three years. In doing so, it was the first major central bank to react to the conflict with such a move.
Higher energy costs drove inflation in the euro area to 3.2 per cent in May, from 3 per cent in April, well above the regulator's 2 per cent target. ECB Governing Council member Joachim Nagel hinted on Friday that another rate hike is possible next month.
The ECB projects headline inflation to average 3 per cent this year, lowering to 2.3 per cent in 2027. It revised its economic growth projections for 2026 and 2027 to 0.8 per cent and 1.2 per cent, respectively, while maintaining a 1.5 per cent growth forecast for 2028.
The downwards revision reflected "a more pronounced impact of the war on commodity markets, real incomes and confidence", the ECB said.
The decision is a reminder of a couple of situations years ago that share a number of similarities with the present.
Mistakes of the past
In 2011, the ECB increased rates to counter high inflation stemming from an energy shock due to a number of factors, including the conflict in Libya, unrest in the Middle East and higher demand especially in emerging markets. Brent during this period spiked to as high as $111 a barrel.
The International Energy Agency at that time said high oil prices had been weighing down especially on countries in the Organisation for Economic Co-operation and Development, whose economies and financial situations were already fragile, while at the same time pressuring national budgets in non-OECD countries, causing inflation to jump.
After the ECB raised rates that year, it quickly reversed course months later as the eurozone debt crisis intensified and growth deteriorated – and that's the "ghost of 2011" that shares some similarities with the present environment, said Daniela Hathorn, a senior market analyst at Capital.com.
"Much of the inflation pressure [today] is once again linked to energy markets, while economic activity remains fragile. That creates a genuine risk that policymakers tighten into a slowdown if the energy shock proves temporary or demand weakens more sharply than expected," she said.
Policymakers are also trying not to repeat the mistakes of 2022, the year of the Russia-Ukraine war, when inflation was initially viewed as transitory and the ECB was widely criticised for reacting too slowly as price pressures became embedded in the economy, Ms Hathorn said.
"The most interesting aspect of the decision is the balancing act the ECB is attempting to perform ... the ECB appears more willing to risk overtightening than to risk losing control of inflation expectations again."
Calm and collected
The ECB's expected move was meant to address the fallout of the US-Iran war, particularly on energy markets, and its updated macroeconomic projections suggest that it anticipates limited growth risks resulting from higher energy prices, but considerable and long-lasting inflation risks, said David Kohl, chief economist of Swiss bank Julius Baer, which expects another 25-basis-point hike next month.
"Until the next meeting in July, growth concerns will most likely remain absent and inflation will remain above 3 per cent," he said, pointing out that a "confident" ECB president Christine Lagarde delivered a "well-telegraphed reaction" from the regulator.
"The policy tightening is fully consistent with the ECB’s updated growth and inflation forecasts, making another rate hike at the next policy meeting highly likely."
Hamza Dweik, head of trading for the Middle East and North Africa at Denmark's Saxo Bank, noted that Ms Lagarde – the former head of the International Monetary Fund – was firm and cautious at the same time.
"While the ECB acknowledged that inflation risks are skewed to the upside, it stopped short of committing to a sustained hiking cycle, reiterating a data-dependent, meeting-by-meeting approach," he said.
"This suggests that the decision is more about reinforcing credibility and preventing inflation expectations from drifting, rather than signalling an aggressive tightening path from here."
That is reflective of the US Federal Reserve under former chairman Jerome Powell, whose similarly approach constantly caught the ire of US President Donald Trump who had batted for significantly lower interest rates.
The Fed remains the world's most influential central bank, whose decisions are largely followed by other apex regulators, such as those in the Gulf.
Before the war broke out, the Fed was widely expected to consider more rate cuts, but economic uncertainty and higher inflation has changed that tone, with reports that its rate-setting committee is now leaning more towards holding rates, or even raising them.
That would go against Mr Trump's calls for lower rates and could be a trial-by-fire for newly-installed chairman Kevin Warsh, who Mr Trump hand-picked to lead the Fed.
"Mr Warsh will inherit a hot seat, with cost pressures now becoming quite apparent," analysts at Barclays had said.
