By Sudeshna Ghoshal and Ragini Mathur
Sept 10 (Reuters) - European shares fell to 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 a war-driven energy shock.
The pan-European STOXX 600 was down 0.7% at 635.97 points, its lowest level since July 8. Most major regional markets also traded 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 Iran war does not spread through the euro zone economy, which is particularly vulnerable to the shock due to its dependence on fuel imports.
The central bank also lifted its 2026 economic growth projection to 0.9% from 0.8% seen in June and now expects inflation averaging 3% this year.
“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," Mark Wall, Deutsche Bank's chief European economist, said.
"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."
ECB President Christine Lagarde said at a post-meeting press conference that "risks to the inflation outlook are to the upside" and that price pressures could remain above target for an extended period.
However, she stressed the bank had not pre-committed to any future moves.
Germany's 10-year bond yield, the benchmark for the bloc, rose to its highest level since 2011. 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 more than 3% on the day, with benchmark Brent crude hitting $105 a barrel, after the biggest spike in attacks on shipping since the Iran war began spurred traders' concerns about supply disruptions. [O/R]
In Europe, miners were the worst-hit sector, down 3.7%. Copper-mining firms KGHM, Antofagasta , Aurubis and Anglo American fell between 5% and 8% as prices of the red metal declined after Reuters reported the White House has yet to decide on refined copper tariffs. [MET/L]
A report on Thursday showed that the U.S. Producer Price Index (PPI) came in hotter than expected, sparking a sell-off on Wall Street. [.N]
Analysts and traders expect the U.S. consumer price report, due on Friday, to play a key role in determining whether the Federal Reserve hikes interest rates next week.
Among individual stocks, Associated British Foods tumbled 7.9% and posted its biggest one-day percentage decline since January following lacklustre sales at its budget fashion group, Primark.
(Reporting by Sudeshna Ghoshal and Sruthi Shankar in Bengaluru; Editing by Sherry Jacob-Phillips, Sahal Muhammed and Andrew Heavens)
