ECB lifts rate to 2.5%, projects 3% inflation this year

Higher energy prices accompany multiyear highs in European bond yields

The European Central Bank raised interest rates from 2.25% to 2.5% on Thursday and warned that renewed fighting in the Middle East had increased the risk of higher inflation over the next year. ECB President Christine Lagarde spoke to the press in Berlin after the decision.

The bank projected inflation would average 3% this year. It also raised its forecast for eurozone economic growth in 2026 to 0.9%, up from 0.8% in June.

Investors had expected the ECB to raise borrowing costs across the euro bloc, The Guardian reported. The newspaper said investors were spooked by the tone of the ECB report, which it described as hawkish, after the report warned of inflationary pressures building in many sectors of the economy.

“Headline inflation is expected to return to around target towards the end of 2027, supported by the effects of higher interest rates,” Lagarde said.

“We will continue to monitor closely the size and persistence of the energy price increase and how it feeds through to price and wage-setting, inflation expectations and overall economic dynamics,” Lagarde said.

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.”

Rees said a measure of core inflation that excludes volatile elements such as energy and food costs remained “well behaved so far.” He added that the economy was weak and that higher borrowing costs were likely to slow growth.

The Guardian reported that energy prices were the biggest driving force of inflation. Energy prices rose again on Thursday following an increase that week in US and Iranian attacks on ships transiting the Gulf.

Oil and gas prices had also jumped overnight after the latest US and Iranian attacks on ships in the Strait of Hormuz, contributing to higher government borrowing costs. Brent crude passed $105, or £78, a barrel, more than 4% above the previous day.

British gas prices rose above 205p per therm, their highest level since December 2022. The Dutch wholesale gas price, the EU standard, passed €80 per megawatt hour for the first time since January 2023, while the front-month contract traded 3.4% higher at €82.56 per megawatt hour.

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, leading to a broad-based rise in inflation, The Guardian reported.

Recent data showed EU gas stores were 67% full, well below the five-year average of 84%. Investors were concerned that UK and EU governments had underplayed the risk of running out of gas and the negative effect that a subsequent rush for supplies would have on inflation, according to The Guardian.

“This leaves the market vulnerable as we head closer towards the upcoming heating season,” analysts at ING said.

UK and continental European gas buyers had delayed filling storage because they expected the Middle East conflict to be resolved and prices to fall before winter in the northern hemisphere, The Guardian reported. As the war continued, the newspaper said gas prices could rise as buyers scrambled to replenish stocks in the remaining months before cold weather arrived.

Higher energy prices also contributed to climbing government borrowing costs in leading economies. The yield on benchmark 10-year UK government bonds, known as gilts, reached 5.295%, its highest level since August 2007.

Germany’s 30-year government bond yield rose 2.5 basis points to 5.08%, its highest level since December 2003. Germany’s 10-year yield reached 3.45%, its highest since April 2011. France’s 10-year government bond yield rose 1 basis point to 4.344%, its highest since October 2008.

US bond markets also came under pressure. US Treasury Secretary Scott Bessent said the US would buy back $6 billion of government debt, known as US Treasuries, in an effort to alleviate a sell-off that had put pressure on interest rates.

Bond buyers considered the package inadequate, The Guardian reported, and the yield on 10-year Treasuries rose to a three-year high. FRED’s DGS10 series placed the 10-year US Treasury yield at 4.8% on September 10, 2026.