By Sudeshna Ghoshal
Sept 10 (Reuters) - European shares fell to near two-month lows on Thursday as expectations of further interest rate hikes grew after the European Central Bank increased borrowing costs and warned of higher inflation due to war-driven energy shock.
The pan-European STOXX 600 was down 0.5% at 637.73 points, as of 1339 GMT, with most major regional markets trading in the red.
The ECB raised interest rates by 25 basis points to 2.5% on Thursday, its second increase this year, as policymakers
sought to ensure a rise in energy prices stemming from the U.S.-Israeli war on Iran does not spread through the euro zone economy.
The central bank also lifted its 2026 economic growth projection to 0.9% from 0.8% seen in June and now sees inflation averaging 3% this year.
“The inflation projections and the resilient growth is what's been sort of making the market read this as a slightly more hawkish hike. That's why we're seeing the pressure on stock markets," said Fiona Cincotta, senior market analyst, StoneX.
ECB President Christine Lagarde said in a post-meeting press conference that "risks to the inflation outlook are to the upside," and that price pressures could remain above the target for an extended period.
Germany's 10-year bond yield, the benchmark for the bloc, rose to its highest level since 2011 at 3.482%. Traders priced in a further 60 bps of rate increases by the April 2027 meeting, up from around 51 bps before the announcement. [GVD/EUR]
Oil prices jumped 4% on Thursday, with benchmark Brent crude hitting $105 a barrel, after the biggest spike in attacks on shipping since the Iran war began spurred trader concerns about supply disruptions. [O/R]
Shares of European energy companies gained 0.7% to hover just below record levels. Miners were the worst-hit sector, down 3.9%, as a stronger dollar weighed on metal prices.
Analysts and traders expect the U.S. consumer prices report, set to be released on Friday, to play a key role in whether the Federal Reserve hikes interest rates next week.
A report on Thursday showed that the U.S. Producer Price Index (PPI) rose 5.4% in August on an annualized basis, a touch higher than the 5.3% economists polled by Reuters had expected, sparking a selloff on Wall Street. [.N]
Traders are now pricing in a 74% chance of a 25-basis-point hike by the Fed at its September 15 to 16 meeting, according to CME Group's FedWatch tool.
Among individual stocks, Associated British Foods tumbled 9.1% and was poised for its biggest one-day percentage decline since January following lacklustre sales at its budget fashion group Primark.
D'Ieteren edged higher after the Belgian holding group reported higher half-year profit and announced a new CEO.
(Reporting by Sudeshna Ghoshal and Sruthi Shankar in Bengaluru; Editing by Sherry Jacob-Phillips amd Sahal Muhammed)
