The European Central Bank (ECB) has increased its interest rates to 2.5%, citing a heightened risk of inflation over the coming year due to renewed conflict in the Middle East. This decision follows a jump in oil and gas prices overnight, attributed to recent US and Iran attacks on ships in the Strait of Hormuz.
Amidst these developments, UK government debt reached a 19-year high on Thursday. The interest rate on benchmark 10-year UK government bonds, known as gilts, hit 5.295%, a level not seen since August 2007. European borrowing costs also surged.
The ECB also adjusted its forecast for eurozone economic growth in 2026 to 0.9%, up from 0.8% in June, and now anticipates inflation to average 3% this year. Christine Lagarde, the ECB president, stated that headline inflation is expected to return to around target towards the end of 2027, supported by higher interest rates.
Energy prices are identified as a primary driver of inflation, with Brent crude passing $105 a barrel, an increase of over 4% from the previous day. British gas prices rose above 205p per therm, marking the highest point since December 2022. Continental European gas prices also saw increases, with the Dutch wholesale gas price exceeding €80 per megawatt hour for the first time since January 2023.