ECB Raises Deposit Rate to 2.5% Amid Energy Inflation

The European Central Bank raised its key interest rates by 0.25% on Thursday. The deposit rate now stands at 2.5%. This is the second increase in three months. The decision comes as energy prices spike across the continent.

Brent crude oil climbed back above $100 a barrel on Wednesday. The Dutch TTF gas benchmark has risen 190% since the start of the year. Eurozone inflation accelerated to 3.3% in August. It was 2.9% in July. Energy prices rose 14.3% year-on-year.

Core Inflation Remains Below Headline Figures

Core inflation edged down to 2.4% in August. It was 2.5% in July. Services inflation eased to 3.0% from 3.3%. Christine Lagarde stated that wages do not show a material response to the shock. The bank aims to cool domestic demand to prevent imported price shocks from becoming entrenched.

Bank Targets Future Expectations Not Current Prices

The ECB is responding to fears of future structural inflation. Forecasts for 2027 and 2028 were revised upwards. Inflation is projected to stay above the 2% target for an extended period. Lagarde noted that gas prices could rise further due to supply disruptions or a cold winter.

Negotiated wage growth is expected to tick up to 2.7% in the first half of 2027. The bank seeks to interrupt the cycle where workers expect rising prices and employers pass on costs. This prevents an oil shock from becoming a permanent inflation regime. Analysts note the central bank cannot directly control energy supply.

Market Expectations Drive Future Policy Path

Lagarde declined to argue against market pricing for further tightening. She stated the council did not debate the path ahead. Markets are doing their job while the ECB does its own. The silence was interpreted by some economists as hawkish. The bank remains focused on stabilizing expectations against supply-side pressures.