ECB raises interest rates in effort to curb energy-fuelled inflation — SkimNews
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- ECB raised its policy rate to 2.50% from 2.25%, its second hike this year, to combat energy-driven inflation triggered by the Iran war even as oil climbed back above US$100 a barrel
- ECB now projects inflation at 3.0% this year, 2.5% in 2027, and 2.1% in 2028, acknowledging inflation will stay above its 2% target through 2028
- Traders raised bets on further tightening, pricing in 60 bps of additional hikes by the April 2027 meeting, up from 51 bps before the decision
- Lagarde warned gas prices could rise from further supply disruptions or an unusually cold winter combined with low storage, saying inflation "will be longer lasting than we had anticipated"
- Euro zone economy has shown resilience — ECB forecasts growth of 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028, with bank lending accelerating in July
- Long-term euro zone bond yields have reached highs not seen since before the global financial crisis, driven partly by tech-company bond issuance funding the AI boom and German political turmoil
- Economists at Capital Economics and ING argued this energy shock is unlikely to ignite a 2022-style wage-price spiral, noting core inflation eased to 2.4% and German companies are absorbing higher costs
Why it matters: The ECB has now hiked twice in a tightening cycle most economists expected to be over, explicitly linking the move to Iran-war energy disruption. With core inflation already easing to 2.4% and companies absorbing costs rather than passing them through, the ECB is tightening into an economy that may not need it — while long-term bond yields at pre-financial-crisis highs are independently tightening financing conditions across the euro zone.
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