The European Central Bank raised its key rate to 2.5% from 2.25% on Thursday, its second hike this year, as an Iran-war-driven jump in oil prices revived inflation fears. Euro zone bond yields surged to multi-year highs and the euro slipped as traders priced in further tightening.
ECB delivers a hawkish hike
The European Central Bank raised interest rates on Thursday to quell an energy-driven inflation rise, warning that price pressures could prove more lasting than expected. According to Reuters: "We believe inflation will be longer lasting than we had anticipated", ECB President Christine Lagarde told a press conference. The bank now sees inflation returning to its 2% target only by the end of 2027, a later date than previously projected.
Attacks since late August by the U.S. and Iran on military, shipping and energy assets across the Middle East pushed oil prices up more than 4% to an almost four-month high above $105 a barrel on Thursday. That surge, combined with the ECB's tone, knocked euro zone markets as the inflation outlook darkened.
Bond yields jump, euro slips
Germany's 10-year bond yield rose to its highest level since 2011, while France's 30-year yield hit levels last seen in 2003. The gap between French and German 10-year yields, a measure of France's risk premium, widened to more than 90 basis points, its highest since 2012.
Europe's STOXX 600 fell 0.6% while the euro slipped 0.1% against the dollar after the announcement.
Traders bet on more tightening
Money markets now price in around 85 basis points of further monetary tightening by end-2027, up from just under 70 basis points before the meeting, with a December rate hike fully priced in. Sources close to the discussion said further tightening could come as soon as October 29, even though Lagarde said the bank had not debated any future path.
Yet the labour market remains relatively soft and underlying inflation fell last month, pointing to no immediate risk of a wage-price spiral that would force the ECB's hand.
Sources: Investing.com (Reuters), Investing.com (Reuters)
Trading involves risk.
Risk Disclaimer
