European shares fall to two-month lows

The pan-European STOXX 600 was down 0.7% at 635.97 points, its lowest level since July 8

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 hike 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, he said.

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 nearly 51 bps before the announcement.

Oil prices climbed 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.