The European Central Bank raised its deposit rate by 25 basis points to 2.5%, as a fresh energy shock pushes inflation higher across the euro zone. Inflation reached 3.3% in August, with energy prices jumping 14.3%, putting renewed pressure on policymakers to keep tightening.
ECB President Christine Lagarde said the Middle East conflict and ongoing geopolitical tensions could keep headline inflation above the 2% target for longer. At the same time, higher energy costs and trade tensions are threatening economic growth, leaving the ECB facing a difficult balancing act.
Markets are now looking for more rate hikes, with some investors seeing the policy rate reaching 2.75% or even 3%. European bond yields have also climbed sharply as traders price in a longer period of elevated inflation and borrowing costs.
The ECB is keeping its options open and sticking to a meeting-by-meeting approach. If energy prices continue to fuel inflation, another hike could be on the table as soon as December. But the further rates rise, the greater the risk that tighter policy starts to weigh on an already fragile economy.
