European shares fall as data points to stubborn inflation

European shares fell on Thursday after euro zone inflation data suggested that prices remained stubbornly high, bolstering views that the European Central Bank will stick to raising interest rates at a brisk pace.

Consumer price inflation in the 20 countries sharing the euro currency rose 8.5% in February, compared with an increase of 8.6% a month earlier on lower energy prices, but the reading was still above 8.2% projected in a Reuters poll of economists.

While inflation was also lower than a double-digit peak hit in October, fears lingered that the earlier surge in energy prices has seeped into the economy via so-called second-round effects, making price growth even more difficult to root out, reported Reuters.

“High inflation means more aggressive ECB rates, which means less conducive business conditions for European companies,” said Giles Coghlan, chief market analyst at HYCM.

Markets are seeing the ECB’s depo rate at around 4.04% by year-end.

Earlier in the week, data from Spain, France and Germany indicated that inflation remained sticky and fed into fears that the ECB would remain hawkish for longer.

ECB Chief Christine Lagarde said price declines have not been stable and that rates will have to rise higher and stay higher for some time.

James Rutherford, head of European equities at Federated Hermes International, cautioned that the ECB may end up tightening rates too far to tackle it, ultimately resulting in an economic slowdown.

The continent-wide STOXX 600 (.STOXX) fell 0.2%, with rate-sensitive technology stocks (.SX8P) down 1.5% after euro zone government bond yields hit fresh multi-year highs.

Markets ended the first two months of this year in gains — a first in four years — with banks (.SX7P) adding 17% as lenders benefit from higher net interest income, a consequence of elevated borrowing costs.