LONDON, Sept 10 (Reuters) - The European Central Bank raised interest rates for the second time this year in a widely flagged move on Thursday, hoping to tame an inflation rise driven entirely by higher energy costs from the Iran war.
The euro weakened 0.3% to around $1.159, and euro zone government bond yields edged up to fresh multi-year highs after the decision. In addition, the oil price surged by more than 4% to $105.3 a barrel, adding to investor concern about a more sustained pickup in inflation.
The rate-sensitive two-year German bond yield was at around 3.072%, holding near more than two-year highs hit earlier in the session, up from 3.058% prior to the ECB decision.
The broad European STOXX 600 index was last down 0.7%.
COMMENTS:
MARK WALL CHIEF EUROPEAN ECONOMIST AT DEUTSCHE BANK, LONDON:
“The inflation risks may be rising and a further hike in December may be more likely than not, but the ECB still needs to tread carefully. The economy has been resilient over the last six months, but rapidly rising gas prices mean the negative supply shock is building. It will eventually hurt growth. The question is how much and when.”
DAVID REES, HEAD OF GLOBAL ECONOMICS, SCHRODERS:
"Higher energy prices will keep headline inflation up, but core inflation remains well behaved so far. Domestic demand is softening, and higher energy costs alongside tighter financial conditions are likely to weigh on eurozone growth, particularly in 2027."
"Despite the hawkish tone of today's statement and forecasts, we believe the bar for further tightening is high. This looks more like a final hike than the start of a prolonged hiking cycle, so markets should not assume rates will move towards 3% unless growth and inflation re-accelerate materially."
RICHARD CARTER, HEAD OF FIXED INTEREST RESEARCH, QUILTER CHEVIOT
"The ECB's balancing act is becoming increasingly difficult. Growth across parts of the eurozone remains fragile and there is a fine balance between keeping inflation under control and weighing further on economic activity. While we are not yet at the point where stagflation is the base case, the combination of weaker growth and renewed inflationary pressure is becoming harder for policymakers to ignore."
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS:
"As expected, the ECB raises interest rates for the second time in three months, and signals that more policy tightening will likely be required in the coming meetings."
"Although no pre-commitment is made, the new quarterly forecasts show core inflation at 2.3% in 2028. This is higher than the 2.2% projection which was made in June, which indicates that more rate hikes will be needed to get inflation to the 2% target in the medium term."
ED HUTCHINGS, HEAD OF RATES, AVIVA INVESTORS:
"Overall, the immediate priority for the ECB is clear: address the inflationary backdrop, and, as such, the market is right in thinking more hikes will be coming. However, with two hikes already being delivered and more than a further two hikes priced, things may well have gone too far."
PATRICK ERNST, MACRO INVESTMENT STRATEGIST, JPMORGAN PRIVATE BANK:
"Another hike before year-end is no longer a tail risk. Driven by the latest Middle East conflict escalation, oil and gas prices have moved materially higher, bonds have sold off, and expectations for further central bank tightening have firmed. The ECB moved as anticipated, but what accompanied that rate decision matters more."
"In keeping the door open to further tightening, policymakers made clear that an energy-led inflation risk is still very much in play. One hike is not a ceiling. The odds of another before year-end have risen, and the path from here will depend considerably on how the geopolitical picture develops."
CONOR PARLE, EURO ZONE ECONOMIST, FIDELITY INTERNATIONAL:
"Higher gas and fuel prices will keep the ECB vigilant to a broadening of price pressures, with the recent heatwave and accompanying supply chain impacts likely to increase food inflation. Further to this, the Indeed wage tracker points to a slight pick-up in wage growth that will be monitored for early evidence of second round effects."
SYLVAIN BROYER, CHIEF EMEA ECONOMIST, S&P GLOBAL RATINGS
"This rate hike is not just an insurance move. The inflation outlook has worsened over the summer. Supply shocks are not only multiplying, but it is increasingly likely that demand is also adding to inflation. In that context, the ECB may need to move into restrictive territory and cannot rule out further rate hikes at this stage."
(Reporting by the Reuters Markets Team; Compiled by Dhara Ranasinghe; editing by Amanda Cooper)
