ECB Hikes Rates as Oil Hits $105

The European Central Bank raised interest rates for the second time this year on Thursday. The move aims to curb inflation driven by energy costs linked to the Iran conflict. Oil prices jumped 4% to $105.30 per barrel. The euro fell 0.3% against the dollar, reaching $1.159. Bond yields in the eurozone climbed to multi-year highs.

The two-year German bond yield rose to 3.072%. This level is near the highest point in over two years. The yield increased from 3.058% before the decision. The STOXX 600 index dropped 0.7%. Investors are concerned about sustained inflationary pressure.

Energy Costs Drive Inflation

Deutsche Bank notes that gas prices are rising rapidly. This supply shock threatens economic growth. Schroders states that headline inflation remains high due to energy. Core inflation is currently stable. Domestic demand is softening. Higher costs and tighter conditions will weigh on growth in 2027.

Quilter Cheviot warns that the balance between growth and inflation is fragile. Stagflation is not the base case yet. However, weaker growth and inflation pressure are becoming harder to ignore. Saltmarsh Economics points to a core inflation forecast of 2.3% in 2028. This is higher than the previous 2.2% projection. More rate hikes may be needed to reach the 2% target.

Markets Expect Further Hikes

Aviva Investors believes the market is right to expect more hikes. However, they argue the policy may have gone too far. Two hikes have already occurred. Markets price in more than two additional hikes. JPMorgan Private Bank states that another hike before year-end is likely. The geopolitical situation will determine the path forward.

Policymakers kept the door open for further tightening. An energy-led inflation risk remains active. One hike is not a ceiling. The odds of another hike before year-end have risen. The situation depends on how the Middle East conflict develops. GN markets/inflation (en-US) reported on these developments.