ECB Raises Rates to 2.50% as Energy-Driven Inflation Forces Second Hike of 2026

The European Central Bank raised all three of its key interest rates by 25 basis points on September 10, bringing the deposit facility rate to 2.50%, in its second rate increase of the year. The move was driven by resurgent energy prices tied to the conflict involving Iran, which has reignited inflation pressures across the eurozone. The ECB signaled no preset path for future policy, but markets moved quickly to price in more tightening.

New ECB staff projections revised the inflation outlook upward, with headline inflation now seen averaging 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028. The bank said inflation will remain above its 2% target for an extended period, even as ECB President Christine Lagarde noted the economy proved resilient in the second quarter despite the energy shock. Lagarde also acknowledged the ECB was surprised by lower-than-expected inflation at some point, and cautioned that uncertainty can change conditions almost overnight.

Markets interpreted the ECB's action as a signal for broader central bank hawkishness. Traders priced in more than a 50% chance of another ECB hike in October, with 75 basis points of additional ECB tightening now expected by October 2027. The move also reverberated in U.S. markets: prediction platform Kalshi showed Fed hike odds for September surging to 64% for a 25-basis-point increase, up from 36% for no change. That repricing was compounded by a hot U.S. producer-price index reading for August, which rose 0.4%, accelerating from 0.1% in July and adding to fears that energy-driven inflation is broadening. Global bond yields rose across the session on the combined signals.