ECB raises interest rates in effort to curb energy-fuelled inflation — SkimNews
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- European Central Bank raised its benchmark deposit rate to 2.5%—the upper end of the "neutral" range that neither restricts nor stimulates growth—in its second hike this year, aimed at taming inflation fueled by energy costs from the Iran war.
- Eurozone inflation surged past 3% last month, well above the ECB's 2% target, driven by surging oil and natural gas prices tied to the conflict's escalation and below-norm gas storage ahead of winter.
- ECB lifted its 2026 economic growth projection to 0.9% from 0.8% in June, and now projects inflation averaging 3% this year and 2.5% in 2027.
- Underlying inflation actually slowed last month as services inflation moderated and wage growth continued to decelerate, confounding expectations that energy costs would quickly spill into broader prices.
- Bond yields have risen sharply across the eurozone—mostly tracking US Treasuries—tightening financing conditions and effectively doing some of the central bank's tightening work for it.
Why it matters: Reaching 2.5% puts the ECB at the upper boundary of its 'neutral' range, meaning any further hikes would actively restrict growth rather than simply withdraw stimulus. With underlying inflation and wage growth already decelerating, and bond markets independently tightening conditions, the bank's case for additional moves is narrowing even as the Iran war keeps headline energy inflation hot.
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