The European Central Bank raised its key interest rate to 2.5% on Thursday and warned inflation risks have risen after renewed fighting in the Middle East pushed oil above $105 a barrel. The bank now expects eurozone inflation to average 3% this year, up from its earlier forecast, while government bond yields across Europe surged on the back of the energy shock.
ECB lifts rates as energy prices jump
The European Central Bank raised interest rates to 2.5% from 2.25%, warning that the risk of higher inflation over the next year has increased following renewed US and Iranian attacks on ships in the Strait of Hormuz. Investors had expected the hike, but the hawkish tone of the bank's report caught many off guard.
It also lifted its 2026 growth forecast for the eurozone to 0.9%, up from 0.8% in June, even as it now expects inflation to average 3% this year. ECB president Christine Lagarde said: "Headline inflation is expected to return to around target towards the end of 2027", adding the bank would keep monitoring how the energy price increase feeds through to wages and inflation expectations.
Oil and gas surge fuel the inflation warning
The renewed attacks on Gulf shipping sent Brent crude above $105 a barrel, more than 4% higher than the previous day, while British gas prices rose above 205p per therm, the highest since December 2022. Dutch wholesale gas, the EU benchmark, passed €80 per megawatt hour for the first time since January 2023.
David Rees, head of global economics at Schroders, said the hike was expected but that higher energy prices would keep headline inflation elevated, even as core inflation, which strips out energy and food, remained "well behaved so far". He added that a weak economy and higher borrowing costs were likely to slow growth further.
Bond yields climb across Europe
The energy shock pushed government borrowing costs higher across the continent. The 10-year UK gilt yield hit 5.295%, its highest since August 2007, while Germany's 10-year yield reached 3.45%, the highest since April 2011. France's 10-year yield rose to 4.344%, its highest since October 2008.
Analysts at ING said the market remains vulnerable heading into the coming heating season, as EU gas stores stand at only 67% full, well below the five-year average of 84%. Buyers had delayed refilling stocks in hopes the Middle East conflict would ease before winter.
Source: Business | The Guardian
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