European Central Bank president Christine Lagarde addresses the press in Berlin, Germany, after rate hike decision.
5% amid warning Iran war is fuelling inflation Borrowing costs soar in Europe and oil tops $105 a barrel as bank flags mounting price pressures in eurozone Business live – latest updates The European Central Bank has raised interest rates to 2.5% and warned that the risk of higher inflation over the next year has risen following renewed fighting in the Middle East.
It came as government bonds soared on a jump in oil and gas prices overnight after the latest US and Iran attacks on ships in the strait of Hormuz.
UK government debt rose to a 19-year high on Thursday and European borrowing costs surged as oil rose above $105 (£78) a barrel and gas also jumped.
Investors had expected the ECB to raise the cost of borrowing across the euro bloc, but were spooked by the hawkish tone of the central bank’s report, which warned of inflationary pressures building in many sectors of the economy.
David Rees, head of global economics at Schroders, said: “Today’s hike was expected, but the outlook from here is much less certain.
Higher energy prices will keep headline inflation up.” The ECB, which increased rates from 2.25% to 2.5%, lifted its 2026 forecast for economic growth to 0.9%, up from 0.8% in June, and now expects inflation to average 3% this year.
He said a measure of core inflation, which strips out volatile elements such as energy and food costs, remained “well behaved so far”.
Rees added that the economy was weak and higher borrowing costs were likely to slow growth.
The interest rate on benchmark 10-year UK government bonds, also known as gilts, hit 5.295%, the highest since August 2007.
Bond yield chartThe rate, or yield, on Germany’s 30-year government bond rose 2.5 basis points to 5.08%, the highest since December 2003.
The 10-year yield hit 3.45%, the highest since April 2011.
France’s 10-year government bond yield was the highest since October 2008 at 4.344%, up 1 basis point.
Brent crude passed $105 a barrel up more than 4% on the previous day.
British gas prices rose to above 205p per therm, the highest since December 2022.
Continental European gas prices also rose.
The standard for the EU, the Dutch wholesale gas price, hit €80 per megawatt hour (MWh) for the first time since January 2023.
The front-month contract is trading 3.4% higher at €82.56/MWh.
Central banks are concerned that high fuel and energy prices will feed into higher transport costs and more expensive heating for commercial and residential properties, which will lead to a broad-based rise in inflation. skip past newsletter promotion after newsletter promotion Investors are concerned that UK and EU governments have underplayed the risk of running out of gas and the negative effect a subsequent dash for supplies will have on inflation.
Recent data shows EU gas stores are only 67% full, well below the five-year average of 84%.
Analysts at ING said: “This leaves the market vulnerable as we head closer towards the upcoming heating season.” UK and continental European gas buyers have delayed filling gas stores in the expectation that the Middle East conflict will be resolved and prices will be lower before winter in the northern hemisphere.
As the war drags on, there is the prospect of gas prices rising due to a scramble of buyers looking to replenish stocks in the remaining months before cold weather arrives.
Bond markets were also put on alert by the US treasury secretary, Scott Bessent, who said the US would buy back $6bn worth of government debt – known as US treasuries – in an effort to alleviate a sell off in the US bond market that has put pressure on interest rates.
But the size of the package was considered inadequate by bond buyers and the yield on 10-year Treasuries rose to a three-year high.
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