The European Central Bank raised its key deposit rate by 25 basis points to 2.5% on Thursday, delivering its second rate increase since the conflict in Iran began in late February and reinforcing a hawkish turn among major central banks. The decision was widely expected, but it landed amid a renewed energy-driven inflation scare that has pushed Brent crude above $100 a barrel for the first time since July and lifted European natural gas prices to their highest level since 2023.
Euro zone inflation climbed to 3.3% in August, its fastest pace in nearly three years. The ECB said inflation “is set to remain well above target for an extended period,” signaling that further tightening remains possible. Markets are already pricing in a strong probability of another ECB hike this year, with traders pointing to a 90% chance of a third increase in 2026.
The move put pressure on other central banks. Investors now widely expect the U.S. Federal Reserve to raise rates at its September 15-16 meeting, reversing earlier uncertainty before the ECB announcement. The Bank of England is also expected to tighten in November. Federal Reserve Chair Kevin Warsh has given little forward guidance since taking over this summer, and some market participants are reading the ECB’s decision as a sign the Fed will follow.
European equities were mixed. The Stoxx 600 dipped 0.3% after Wednesday's 1.4% selloff, while banking shares gained: Societe Generale rose about 1.6%, Deutsche Bank added 1.3%, and Banco Santander climbed 0.7%. Tech and consumer names came under pressure, with ASML off 1.1% and SAP down around 3%. Associated British Foods dropped nearly 12% after weak Primark sales.
The euro slipped 0.2% against the dollar. ECB President Christine Lagarde’s press conference was closely watched for signals on whether policymakers will adopt a wait-and-see approach or keep hiking. While the euro zone economy expanded 0.6% in the second quarter and the ECB upgraded its growth forecasts, board member Isabel Schnabel has warned that second-round inflation effects become more likely as the conflict continues.
