The European Central Bank raised its key interest rate to 2.5% and warned that the risk of higher inflation has increased following renewed fighting in the Middle East, spooking investors who had expected the rise but not the hawkish tone accompanying it. The move came as oil and gas prices surged overnight after fresh US and Iranian attacks on shipping in the Strait of Hormuz, pushing government borrowing costs across Europe and the UK sharply higher and raising fears of broader inflationary pressure heading into winter.

The ECB lifted rates from 2.25% and now expects eurozone inflation to average 3% this year, while raising its 2026 growth forecast to 0.9%. Brent crude passed $105 a barrel, UK gas prices hit their highest since December 2022, and UK 10-year gilt yields reached 5.295%, a 19-year high, with German and French bond yields also climbing to multi-decade peaks. Analysts noted core inflation remains contained for now, but warned that EU gas stores are only 67% full versus a five-year average of 84%, leaving markets vulnerable as buyers delay restocking in hopes the conflict eases before the heating season.