The European Central Bank raised its main interest rate to 2.5% on Thursday and cautioned that the recent escalation of hostilities in the Middle East has heightened the risk of more persistent inflation in the eurozone.
In its statement, the ECB said growing price pressures were likely to be "longer lasting than we had anticipated," signalling concern that the conflict could feed through to energy and goods prices and complicate the bank's task of bringing inflation back to target.
Markets reacted swiftly to the central bank's assessment and developments in the region. Oil topped $105 a barrel and government borrowing costs across parts of Europe rose sharply after a jump in oil and gas prices following the latest US and Iran attacks on ships in the Strait of Hormuz.
The rate increase to 2.5% is the ECB's latest move to restrain demand and tame inflationary momentum. Officials said the balance of risks to inflation over the coming year has shifted higher as geopolitical shocks push up energy costs, adding uncertainty to the outlook for price growth and public finances.
Investors and policymakers will now be watching oil and gas markets closely for signs that the supply impact from regional tensions becomes prolonged, which could further feed through to consumer prices and borrowing costs across the euro area.