Eurozone inflation accelerated to 3.3% in August, the highest level since September 2023 and well above the European Central Bank's (ECB) 2% target, prompting investors to increase bets that the ECB will raise interest rates by 0.25 percentage points at its meeting on September 10. Data from Eurostat showed headline inflation accelerated from 2.9% in July, while core inflation eased slightly to 2.4% and services inflation fell to 3%. The main pressure came from higher oil and gas prices due to the Iran war, with Italy's inflation accelerating to 3.2%, Spain surging to 4.5%, while Germany and France also saw increases. ECB board member Isabel Schnabel said borrowing costs need to rise further, while Austrian central bank governor Martin Kocher said another rate hike is necessary in the near future. If the ECB raises rates next week, it would further cement its status as the most hawkish central bank among the G7. The current deposit rate stands at 2.25% and may need to rise to levels that restrict economic activity, with the ECB's chief economist previously indicating that 2.5% is the upper bound of the neutral rate range.
Expected ECB rate hike raises German bond yields.
Inflation surge and hawkish ECB comments increase likelihood of rate hike, pushing yields up.
