Europe close: Stocks fall as Brent hits $106 a barrel, ECB strikes hawkish tone

(Sharecast News) - European stocks fell on Thursday as Brent crude hit $106 a barrel and following an expected rate hike from the European Central Bank, which struck a hawkish tone on the outlook.

The benchmark Stoxx 600 index ended down 0.7% at 635.97, Germany's DAX fell 0.8% to 25,361.15 and France's CAC 40 dropped 0.5% to 8,116.76. Brent crude was up 5.6% at $106.92 a barrel and West Texas Intermediate was 5.8% higher at $101.57 as Yemen's Iran-backed Houthis reportedly seized a key Red Sea port in Yemen.

Earlier in the day, the European Central Bank raised its key interest rate by 25 basis points to 2.50%, as widely expected, as a result of price pressures triggered by the Middle East conflict, predicting that inflation will remain "well above target" for an extended period.

The ECB's Governing Council voted to raise all three of its interest rates by the same amount, taking the key main refinancing operations (MRO) rate to 2.65%, and the deposit facility and marginal lending facility to 2.50% and 2.90%, respectively. The last time the MRO was this low was in March 2025.

New projections by ECB staff see headline inflation averaging 3.0% in 2026, before easing to 2.5% in 2027 and 2.1% in 2028, with the latter two years' numbers revised higher than previous estimates in June.

Over the next three years, core inflation (which excludes the more volatile energy and food items) is seen at 2.5%, 2.6% and 2.3% respectively.

Neil Wilson, UK investor strategist at Saxo Markets, said the ECB hiked as expected and raised its outlook for inflation for the next two years but didn't explicitly lean into needing more hikes.

"It doesn't need to do that right now because bonds are selling off so hard," Wilson said. "Staff forecasts indicate headline inflation running a little higher in 2027 and 2028 than they forecast in June, while growth estimates for this year and next were also stronger thanks to the better-than-expected resilience of the euro area economy. It's also due to fiscal loosening.

"On the whole this looks a touch more hawkish - it doesn't lean into market pricing as such but the market is saying look you will probably hike again whatever you tell us today. Bund yields ripped higher and the spread between French and German yields moved out to the widest since the Eurozone sovereign debt crisis, pushing above 90bps as of send time, highlighting the next problem for the ECB - controlling spreads via its asset purchase instrument."

In corporate news, Associated British Foods slid after saying it expects full-year like-for-like sales at its Primark division to fall by 2.6% amid a tough consumer environment, adding that it also planned to introduce home delivery at the clothing retailer. Primark's total sales growth was expected to come in at 2% for both the fourth quarter and full year thanks to new stores and franchises. The company, which also owns food and ingredients operations, maintained full-year guidance.

Belgium's D'Ieteren reversed earlier gains to end down despite posting a rise in half-year profit, and as it announced a new chief executive.