ECB Boosts Deposit Rate to Combat Eurozone Inflation Surge

The European Central Bank (ECB) has raised its deposit facility rate from 2.25% to 2.5%, the second hike since June 11. The main refinancing rate was lifted to 2.65%, and the marginal lending facility to 2.9%. This decision follows an August inflation reading of 3.3%, with energy costs contributing nearly all the increase.

Energy inflation jumped to 14.3% from 10.3%, driven by constrained crude supply due to the conflict in the Middle East. The ECB notes that this time, the energy supply shock dominates, while demand and public policy stimulus have minor roles.

The eurozone inflation average conceals a wide spread, with August inflation running at 4.5% in Spain, 2.9% in Germany, and 2.7% in France. Christine Lagarde had signalled this move in July, saying 'the burden of proof is on data,' and that the full inflationary impact of the energy shock has yet to play out.

Attention now turns to Frankfurt's peers, with the Federal Reserve expected to consider a hike on September 16, and the Bank of Japan on the 18. The ECB staff projections continue to estimate that headline inflation will average 3% this year, but have revised up expectations for 2027 and 2028.