European Central Bank President Christine Lagarde said that the conflict in the Middle East is still generating inflationary pressures, and inflation is expected to remain much higher than its target for an extended period, noting that the bank’s decision to raise the main interest rate to 2.50 percent from 2.25 percent is a commitment to managing monetary policy in a way that ensures the stability of inflation at the target of 2 percent in the medium term.
According to Lagarde, the new baseline estimates prepared by European Central Bank experts indicate that general inflation will average 3 percent in 2026, 2.5 percent in 2027, and 2.1 percent in 2028. Excluding energy and food, the baseline estimates expect inflation to reach 2.5 percent in 2026, 2.6 percent in 2027, and 2.3 percent in 2028.
Compared to June estimates, there was no change in inflation expectations for 2026, while they were raised for 2027 and 2028. The basic estimates for economic growth are 0.9 percent for 2026, 1.4 percent for 2027, and 1.5 percent for 2028. These estimates represent an upward revision for both 2026 and 2027, and mainly reflect the ability of the euro area economy to withstand more than expected.
Lagarde added: “The outlook remains very uncertain, with inflation risks tending to rise and economic growth risks to decline. With regard to the energy shock, the updated scenarios prepared by the Bank’s experts illustrate the wide range of possible outcomes of the growth and inflation path under different assumptions regarding the severity and duration of the shock, as well as its indirect effects and second-round effects.
She continued: “With today’s decision, we remain in a good position to deal with the uncertainty resulting from the conflict. We will take a data-driven, meeting-by-meeting approach in determining the appropriate monetary policy stance. Our decisions on interest rates will be based, in particular, on our assessment of inflation expectations and the risks surrounding them, in light of incoming economic and financial data, as well as the dynamics of core inflation and the strength of the transmission of monetary policy. We do not commit in advance to a specific path for interest rates.”
Economic activity
The eurozone economy has shown resilience despite the energy shock, with continued growth supported by manufacturing industries, government spending, and a recovery in consumer confidence. The unemployment rate stabilized at 6.4 percent in July, while productivity gradually improved. Growth prospects have improved thanks to resilient consumption and public spending, with expectations of additional support from lower energy prices, corporate investment, housing, and external demand, despite competitive pressures and trade uncertainty. The bank stressed the importance of structural reforms and the soundness of public finances, in addition to simplifying the rules of the single market, accelerating the energy transition, and completing the union of savings and investments, with the need for financial responses to the energy shock to be temporary and targeted.
Inflation
Eurozone inflation rose to 3.3 percent in August from 2.9 percent in July, driven by a rise in energy price inflation to 14.3 percent. On the other hand, inflation - excluding energy and food - fell to 2.4 percent, with services inflation falling to 3 percent, while goods inflation rose to 1.2 percent. Core inflation measures remained broadly stable, while compensation growth per employee slowed to 3.3 percent in the second quarter, and unit labor cost growth eased to 2.6 percent.
The energy shock is expected to keep inflation well above target until the first half of 2027, before it gradually declines and approaches 2 percent by the end of the year. The bank monitors the transmission of rising energy prices to prices, wages, and inflation expectations, amid continued risks of rising inflation.
Risk assessment
Growth risks tend to the negative side, due to the conflict in the Middle East and the Russian war on Ukraine, and the resulting disruptions in energy supplies and rising energy prices, in addition to tightening financial conditions and renewed trade tensions, which put pressure on consumption, investment, and exports.
On the other hand, growth may exceed expectations if the economy and energy markets adapt quickly to shocks, or conflicts are resolved, in addition to the impact of technology adoption, spending on defense, infrastructure, and reforms that support productivity.
As for inflation risks, according to Lagarde, they tend to the upside, with the possibility of an intensification of the energy shock and a rise in gas and food prices, especially in the event of continued supply disruptions or a decrease in gas stocks. Trade tensions, fragmentation of supply chains, and extreme weather events may also increase price pressures.
Conversely, inflation may be lower than expected if geopolitical conflicts subside, spillover and second-round effects of the energy shock are less severe, or increased market volatility and risk aversion weaken demand.
US stocks fell on Thursday under pressure from the sharp rise in oil prices, with Brent crude returning to levels not seen since May, at a time when tensions related to the war with Iran disrupted global crude oil flows, reinforcing concerns about inflation and increasing pressures in the bond market.
The S&P 500 index fell by 0.6 percent, heading towards recording a loss for the fourth session in a row, despite remaining close to the highest record level recorded last month. The Dow Jones Industrial Average fell 153 points, or 0.3 percent, by 9:35 a.m. Eastern Time, while the Nasdaq Composite Index lost 0.9 percent, according to the Associated Press.
The stock decline came as Brent crude, the global benchmark for oil prices, rose an additional 4 percent, exceeding $105 a barrel for the first time since May. The price of standard US crude also rose by 3.8 percent, briefly exceeding $100 a barrel for the first time since before the Memorial Day holiday.
Oil prices have continued to rise since early July, when the price of Brent crude was below $72 per barrel, with declining hopes of soon reaching an agreement between the United States and Iran that would allow the full reopening of the Strait of Hormuz.
President Donald Trump said on Wednesday that oil prices are likely not to fall before the US midterm elections scheduled for November.
The rise in oil prices led to an increase in the average price of a gallon of regular gasoline in the United States to about $4.28, according to data from the American Automobile Association, an increase of approximately 34 percent from its level a year ago. The repercussions of rising fuel prices are not limited to what consumers pay at gasoline stations, but also extend to the costs of transporting goods by truck, which may raise the prices of a wide range of products in stores.
This coincided with the release of data showing an acceleration of inflation at the wholesale price level in the United States to 5.4 percent last month, compared to 4.8 percent in July. These cost increases may eventually be passed on to consumers as retailers raise prices for goods and services.
Consumer price data is scheduled to be released on Friday, which will provide a clearer indication of the extent of the impact of inflation on American families.
High inflation increases pressure on the Federal Reserve, as one of the usual tools to curb high inflation is to raise the key interest rate. This move leads to higher borrowing costs throughout the economy, reducing demand and putting pressure on investments and prices.
On the other hand, other data issued on Thursday showed that the American labor market may still enjoy some degree of strength, after the number of workers applying for unemployment benefits decreased during the past week.
Following the release of the data, traders' bets rose that the Federal Reserve would raise the main interest rate at its next meeting next week. CME Group data showed that markets are currently pricing in a probability of about 70 percent to raise interest rates, compared to 61 percent the previous day, despite continued pressure from Trump to lower interest rates.
In Europe, the European Central Bank also raised interest rates on Thursday, in an effort to reduce inflation, warning that the conflict in the Middle East “continues to generate inflationary pressures.”
Growing concerns about inflation were reflected in the bond market, as the yield on 10-year US Treasury bonds rose to 4.91 percent, from 4.83 percent at the end of Wednesday’s trading. The yield was only 3.97 percent before the outbreak of war with Iran, returning to levels last seen in the fall of 2023, after the Federal Reserve approved sharp increases in interest rates in the wake of the Covid pandemic.
Higher yields make bonds more attractive to investors, allowing them to achieve greater returns on their investments, which may reduce their willingness to pay higher prices for stocks and other riskier assets.
Macy's shares fell by 2.7 percent, despite the retail company announcing quarterly profits and revenues that exceeded analysts' expectations, in addition to raising its profit expectations and other financial indicators for the fiscal year. The company, on the other hand, warned of the presence of “macroeconomic and geopolitical factors” that may affect customers’ willingness to spend.
Macy's said that it received $116 million from the government in the form of customs duty refunds, including $98 million during the fiscal quarter and $18 million after its end.
Macy's is using part of those proceeds to lower the prices of some goods, including furniture and other high-value purchases, Tony Spring, the company's CEO, told the Associated Press on Thursday.
In terms of global markets, indices declined in most parts of Europe and Asia, and the Hang Seng Index in Hong Kong fell by 1.3 percent, recording one of the largest declines among major indices globally.
