The European Central Bank (ECB) raised its benchmark deposit rate to 2.5 percent, citing a surge in energy prices from Middle East conflict and concern inflation will last longer.

The ECB said on Sept. 10 it decided to raise the deposit rate, the main refinancing rate and the marginal lending facility by 0.25 percentage point each. From Sept. 16, the deposit rate will be 2.5 percent, the main refinancing rate 2.65 percent and the marginal lending facility 2.90 percent. The ECB judged the Middle East conflict was increasing inflationary pressure and that prices would stay above its target for a considerable period.

The ECB raised its forecast for euro zone economic growth this year to 0.9 percent from 0.8 percent in June. It judged the economy was weathering shocks better than expected. It forecast average consumer inflation at 3 percent this year. It expected inflation to slow to 2.5 percent in 2027 and 2.1 percent in 2028, but said it would take considerable time to return to its 2 percent target.

Energy is at the core of price pressure. As concerns grew over shipping attacks and supply disruptions in the Middle East, Brent crude briefly rose above $105 a barrel on Sept. 10 and later settled at $107.63. European natural gas prices also surged, adding to concerns over winter energy costs. The European Union's gas storage rate is about 67 percent, below 80 percent a year earlier.

The ECB is also wary of second-round effects from rising energy prices spreading to transport and production costs and to food and services prices. ECB President Christine Lagarde (Christine Lagarde) said, "Inflation may stay high for longer than expected." The ECB said it would not pre-commit to a future rate path and would decide after assessing economic and inflation indicators at each meeting.

Rate rises and higher energy prices are also weighing on bond markets. Britain's 10-year government bond yield climbed to 5.378 percent, the highest since 2007, while German and French government bond yields also jumped to their highest levels in years. If the Middle East-driven energy shock lasts longer, Europe is expected to face the burden of persistent high inflation and high interest rates at the same time.