ECB raises interest rates to fight off inflation jump
The hike on Sept 10 raises the ECB’s benchmark deposit rate to 2.5 per cent.
Frankfurt - The European Central Bank (ECB) raised interest rates for the second time in 2026 on September 10 in an effort to curb an inflation surge primarily driven by high energy costs stemming from the Iran war. In August, inflation in the 21-country euro zone skyrocketed to over 3%, significantly surpassing the ECB's 2% target.
This sharp increase in energy prices, notably oil and natural gas, threatens to further strain the economy, potentially trickling down to wage-setting mechanisms. Following the Berlin meeting, the ECB acknowledged the highly unpredictable nature of the inflation outlook, citing risks on both the upside for inflation and the downside for economic growth.
The bank also revised its 2026 economic growth projection upward to 0.9% from 0.8% in June and now anticipates inflation to average 3% in 2026 and 2.5% in 2027. Despite the interest rate hike, which brought the ECB's benchmark deposit rate to 2.5%, the upper end of the "neutral" range considered by policymakers, financial investors anticipate further hikes later in 2026 and 2027.
However, the ECB is expected to exercise caution with any subsequent moves due to a mixed outlook. The surge in high energy costs indicates persistent inflation, and experts expect the US-Israeli war on Iran, which began late February, to persistently fuel inflation. Additionally, concerns over rising natural gas prices are growing, as gas storage levels are at historic lows as the winter heating season approaches.
While economic growth is currently outperforming expectations, it may also exert upward pressure on prices. Interestingly, high energy costs have not yet translated into increased prices for other goods and services, challenging assumptions about the rapid manifestation of second-round effects. Underlying inflation, which excludes volatile food and fuel prices, actually decreased in August due to moderating services inflation, while wage growth, a key indicator of price pressures, continues to slow.
Moreover, bond yields have surged significantly, mainly due to parallel increases in US Treasuries, tightening financing conditions and performing some of the central bank's tasks. These factors suggest that even if price pressures linger, they are considerably milder than in 2022, when inflation surpassed 10% as energy prices soared following Russia's invasion of Ukraine. Focus now shifts to ECB President Christine Lagarde's 12:45 GMT press conference.
Written by urgent.news from Straits Times Business's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
