ECB Hikes Rate to 2.5% Amid Rising Energy Costs

The European Central Bank (ECB) raised its deposit facility rate to 2.5% on Thursday, marking the second hike since June 11. The main refinancing rate and marginal lending facility also increased to 2.65% and 2.9%, respectively.

The decision follows an August inflation reading of 3.3%, up from 2.9% in July, with energy costs doing nearly all the work. Energy inflation jumped to 14.3% from 10.3%, driven by constrained crude supply due to fighting around the Strait of Hormuz.

Underneath the surface, core inflation, which strips out energy, food, alcohol, and tobacco, actually fell to 2.4% from 2.5% in August. Services inflation, sensitive to wages, dropped to 3% from 3.3%, with little sign that expensive energy is spreading into the rest of the economy.

The ECB's decision reflects its thinking that adverse energy supply factors account for around 90% of the rise in energy inflation between January and May this year. The eurozone has held up better than expected, but resilience is not overheating, with growth complicating matters further.