ECB Rate Hike Sends Euro Zone Bond Yields Soaring to Multi-Year Highs

Traders in the euro area are bracing for interest rate hikes well into next year after the European Central Bank hiked borrowing costs and increased its inflation forecast.

The ECB lifted its key rate to 2.5%, from 2.25%, as it seeks to ensure a jump in energy prices stemming from the U.S.-Iran war does not spread through the euro zone economy.

Bond yields hit multi-year highs, with Germany's 10-year bond yield rising to its highest level since 2011 and France's 30-year yield hitting levels last seen in 2003.

U.S. and UK bond yields also rose to their highest in around two decades or more, as global energy prices jumped.

The ECB said inflation was set to remain well above target for an extended period, with price growth expected to run at 3% this year but now seen at 2.5% in 2027, up from a forecast of 2.3% in June.

Aymeric Guedy, fund manager at Carmignac, said ECB President Christine Lagarde's tough tone on inflation meant there was little to stop euro zone bonds being caught up in Thursday's global selloff.