European Markets Tumble Amid Interest Rate Hike Fears

European shares plummeted to near two-month lows due to rising interest rate expectations after the European Central Bank raised borrowing costs. Energy prices and inflation concerns, fueled by geopolitical tensions, pressured regional markets. The ECB anticipates continued economic resilience, while further rate hikes loom amid higher inflation forecasts.

European shares reached almost a two-month low on Thursday in response to growing concerns over interest rate hikes. The European Central Bank increased borrowing costs, citing the persistent inflation threat exacerbated by war-related energy shocks. The pan-European STOXX 600 index decreased by 0.5% to 637.73 points at 1339 GMT, with most regional markets experiencing declines.

On Thursday, the ECB raised interest rates by 25 basis points to 2.5%, marking its second increase this year. Policymakers aim to prevent rising energy prices, attributed to the U.S.-Israeli conflict involving Iran, from adversely affecting the eurozone economy. Alongside the rate hike, the central bank adjusted its economic growth projection for 2026 to 0.9%, up from the previous estimate of 0.8%, and now forecasts 3% inflation for this year.

Market analysts, including Fiona Cincotta from StoneX, interpret the inflation forecast and growth resilience as slightly hawkish, contributing to market pressure. ECB President Christine Lagarde emphasized the upward risks to inflation and suggested prolonged price pressures could persist. The 10-year German bond yield reached its highest level since 2011 at 3.482%. Traders are anticipating further rate increases by April 2027 following a substantial rise in oil prices linked to escalating geopolitical tensions.