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FollowingThe European Central Bank raises its main interest rate to 2.5%, warns that inflationary pressures could persist for longer
On Thursday, the European Central Bank (ECB) raised its main interest rate to 2.5% and signaled markets that rising price pressures in the euro zone could last longer than expected. The bank pointed out that the renewed conflict between the United States and Iran has led to soaring energy costs, which in turn has affected the wider economy.
Expected interest rate hikes and disturbing prospects
According to the Guardian, investors generally expect the rate hike to be 25 basis points, or an increase from 2.25%. However, the wording released along with the interest rate hike made the market uneasy. A supporting report from the European Central Bank warned that inflation is building in multiple areas of the economy. European Central Bank President Christine Lagarde told reporters in Berlin that she believed "inflation will last longer than we had previously expected."
This is the first time the euro zone has raised interest rates to this level since March last year. In addition, the European Central Bank also raised its forecast for euro zone growth in 2026 to 0.9%, from 0.8% in June. Currently, the bank expects full-year average inflation to reach 3%, which is well above its clearly reiterated 2% target.
Lagarde gave a rough timetable for alleviating the current situation. She pointed out: "As the effect of high interest rates emerges, the overall inflation rate is expected to return to near the target level around the end of 2027."
Energy market continues to be turbulent
This week, the United States and Iran launched attacks on shipping in the Strait of Hormuz, pushing crude oil prices higher. Brent crude oil futures once exceeded US$105 a barrel, and then fell slightly to about US$104.5, an increase of about 3.3% on the day.
Dutch wholesale gas prices, the EU benchmark, exceeded 80 euros per MWh for the first time, reaching 82.56 euros/MWh, up 3.4% from the previous day, which is also the highest level since January 2023. In the UK, natural gas prices hit 203 pence per thermal unit, setting a new high since December 2022.
The President of the European Central Bank pointed out that although the current food inflation rate is still low at 1.2%, food inflation is likely to rise as oil and gas prices are transmitted through the supply chain. Central bankers worry that the same pressures will push up transportation costs and heating bills for homes and businesses, turning the energy shock into a general shock across the economy.
According to the Guardian, EU natural gas stocks only reached 67%, lower than the five-year average of 84%, as buyers hope to replenish stocks after the conflict in the Middle East has eased. If the conflict does not ease as scheduled, emergency purchases before winter could lead to further price surges.
Bond market is under pressure
Government borrowing costs have risen sharply recently, and this interest rate hike has exacerbated this trend. The yield on the UK's 10-year government bond rose to 5.36%, its highest since August 2007 and its peak in 19 years. Germany's 30-year bond yield rose to 5.08%, the highest level since December 2003; its 10-year yield reached 3.45%, the first time it has seen such a level since April 2011. France's 10-year yield hit 4.344%, the highest since October 2008.
This pressure has also spread to Washington. U.S. Treasury Secretary Scott Bessant said the government will buy back $6 billion in Treasuries to ease downward pressure on U.S. interest rates. However, bond buyers believed the size was too small, and the 10-year yield climbed to a three-year high.
