Oil Surge and ECB Rate Hike Send Stock Prices Reeling

Stock prices in London took a hit on Thursday as oil prices surged above $105 per barrel, fueling inflation concerns and prompting investors to reassess interest rates. The FTSE 100 index fell by 61.14 points (0.6%) to close at 10,608.92, while the FTSE 250 ended down 222.72 points (0.9%) at 23,885.94.

The European Central Bank's decision to raise interest rates for the second time this year added to the market's anxiety. The bank lifted its three key interest rates by 25 basis points, taking the deposit facility rate to 2.50%, the main refinancing operations rate to 2.65%, and the marginal lending facility rate to 2.90%. ECB president Christine Lagarde described the rate increase as a 'no-brainer', but stressed that policymakers did not discuss any future rate decision.

The bank's latest staff projections forecast headline inflation averaging 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028, with energy and food prices excluded from the calculation. Excluding these items, inflation is expected to be around 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028.

Oil prices surged as intensifying military action between the US and Iran fuelled concerns over disruptions to global energy supplies, adding to inflationary fears already weighing on markets. The euro stood at $1.1625 against the dollar, down from $1.1639 on Wednesday, after the ECB's rate hike.

US producer price data also showed hotter-than-expected inflation, with prices rising 5.4% year-on-year in August, topping forecasts of 5.3%. The move was widely expected, with the ECB warning that the US war on Iran continues to generate inflationary pressure and is likely to keep price growth above its 2% target for an extended period.