Oil Price Surge Prompts ECB's Second Rate Hike of the Year
As a string of tanker attacks in the Middle East's Strait of Hormuz and the Red Sea sent international oil prices back above $100 per barrel (roughly 159 liters of crude), the European Central Bank moved to rein in price instability by raising interest rates for the second time this year. At its policy meeting on the 10th, the ECB raised all three of its key policy rates—the rates applied in dealings with commercial banks—by 0.25 percentage points each, lifting the deposit rate paid on funds banks hold with the central bank to an annual 2.5%. The decision was made unanimously, with all members of the Governing Council in agreement.
Inflation was already running above the ECB's target. Eurozone consumer prices rose 3.3% in August, exceeding the central bank's 2% target for a sixth consecutive month, while energy prices soared 14.3% from a year earlier. The ECB projected that eurozone inflation would average 3.0% this year and would still reach 2.5% in 2027. ECB President Christine Lagarde said, 'The conflict in the Middle East continues to fuel inflationary pressure, and inflation is expected to remain significantly above target for a prolonged period.'
The surge in oil prices showed no sign of abating even on the day of the ECB's rate decision. On the 10th local time, West Texas Intermediate (WTI) crude settled at $102.48 per barrel and Brent crude at $107.63, each jumping more than 6% in a single day.
With the hawkish message compounded by soaring oil prices, government bond yields in the United States and Europe climbed in tandem to multi-year highs. Germany's 10-year yield rose to its highest level since 2011, while France's 30-year yield hit its highest point since 2003. The picture was similar in the United States: the 10-year Treasury yield broke above 4.95% intraday, its highest level since October 2023, while the 30-year yield closed at 5.36%, the highest finish since June 2004.
US President Donald Trump argued that oil prices would fall sharply after the midterm elections. 'As soon as the midterms are over, oil prices will come crashing down—and we will be the ones driving them down,' Trump said, adding, 'I expect gasoline prices to fall below $2 per gallon.'
The US Federal Reserve will decide on its benchmark interest rate next week. With US producer prices also rising in August, market expectations for a Fed rate hike are gaining momentum. Oil-driven inflation fears are now weighing on monetary policy on both sides of the Atlantic at the same time.
