(July 23): German bond yields rose to the highest level since 2011 as surging energy prices and mounting inflation expectations fuelled bets on interest-rate hikes ahead of the European Central Bank’s decision later Thursday. 

German 10-year government borrowing costs were three basis points higher at 3.21%. Traders now fully price two quarter-point hikes by the ECB by year end.

Despite the jump in crude prices, the ECB will probably keep its deposit rate on hold at 2.25% on Thursday, buying time to assess the fallout of the renewed fighting between the US and Iran. At the same time, a “surprise hike cannot be fully ruled out”, said Francesco Pesole, a strategist at ING Groep NV.

“The re-escalation in the Middle East and European gas prices rising faster than oil prices should keep hawkish voices dominant in the governing council,” Pesole said.  

Brent crude is approaching US$100 a barrel and European gas prices closed at the highest since 2023 this week as the conflict between the US and Iran escalated this month. 

The increased tensions have prompted warnings from policymakers.

“The development of energy prices is a decisive factor in determining the future inflation outlook,” said the ECB’s Joachim Nagel in a statement last week. “Monetary policy will maintain its vigilant stance.”

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