The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 15, 2022.
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, February 15, 2022. Reuters / STAFF

European shares hit session lows on Thursday after the European Central Bank signalled a higher interest rate hike in September as it raised its inflation forecast and cut economic growth expectations for the year.

The STOXX euro zone stocks index, which recouped almost all its session losses after the central bank kept its benchmark interest rate unchanged, swiftly reversed course to tumble 1.4%. All major bourses in Europe fell 1% or more, with Italy's MIB down almost 2%.

The central bank said it would end a long-running bond buying scheme on July 1 and raise rates by 25 basis points - for the first time in a decade - next month and possibly by a bigger margin in September.

"They did add an explicit caveat that they may consider a bigger hike to be warranted in September, depending on the inflation outlook by then," said Bas Van Geffen, senior macro strategist at Rabobank.

"So basically, they are putting more weight on the updated projections in three months from now... that does make it look a bit more hawkish."

The ECB said inflation is seen averaging 6.8% this year, well above the 5.1% predicted in March as well as its target rate of 2%, while economic growth for the year was cut to 2.8% from a previous forecast of 3.7%.

The region's bank index fell towards session lows, before recovering some ground. They were last down 0.2%.

"A rise will likely be positive for European banking stocks, and marginally negative for other sectors but the impact pales in comparison to the issue of Europe's access to energy," said Robert Alster, chief investment officer at Close Brothers Asset Management.

Investors will now look to U.S. consumer price inflation figures for May, a key data set ahead of the Federal Reserve's policy meeting next week. Inflation is seen rising month-on-month and could see money markets start to price in a more hawkish Fed.

The U.S. central bank has signalled rate hikes this month and the next, most likely by 50 basis points, before it pauses for a data check. But bets have risen that more will follow.

Losses in Europe were largely broad-based, with industrial stocks, heath care and miners weighing the most.

In a post-decision press conference, ECB chief Christine Lagarde said the central bank can deploy new instruments, if necessary, to address fragmentation, an excessive widening of yield spreads that might endanger the transmission of monetary policy across the region.

(The story corrects typo in paragraph 1.)