European shares fall as investors fret about inflation, aggressive interest rates

German share price index DAX graph is pictured at the stock exchange in Frankfurt

By Devik Jain and Amruta Khandekar

(Reuters) -European shares tumbled on Thursday as minutes from the central bank's last meeting fanned fears about the state of inflation in the euro zone and aggressive policy moves to tame it, while weak retail sales data added to jitters around an economic slowdown.

The pan-European STOXX 600 index reversed early session gains and was down 0.6%, extending losses to a second straight session.

European shares had seen a boost at the start of the week on hopes the U.S. Federal Reserve and other central banks will pivot to a less hawkish policy approach.

However, minutes from the European Central Bank's Sept. 7-8 meeting showed policymakers appeared worried that inflation could get stuck at exceptionally high levels, making aggressive policy tightening necessary even at the cost of weaker growth.

"Market is still priced for an aggressive rate hike from the ECB (at the next meeting) and if you look at pretty much all comments coming from the ECB Governing Council, and from the Fed, the main message still seems to be inflation is the number one priority," said Huw Roberts, director of analytics at Quant Insight.

"Markets are starting to process the prospect that the Fed and to a lesser degree the ECB will be forced to keep aggressively hiking rates in the near term."

The ECB had raised rates by 75 basis points at the last meeting and promised further hikes even as the bloc grapples with soaring prices and a cost of living crisis.

Data showed Euro zone retail sales fell in August, pointing to a weakness in consumer demand and underlining expectations of an approaching recession.

After mixed economic data from the United States, the non-farm payrolls report due on Friday will be on investors' radar to gauge the Fed's stance on its ultra-hawkish approach.

Adding to nerves around inflation on Thursday was a sharp rise in oil prices as OPEC+ agreed to tighten global crude supply with steep production cuts. [O/R]

Most of the STOXX sub-sectors were in the red, led by a roughly 2% decline in miners and utilities.

London's blue-chip FTSE 100 reversed early session gains to fall 0.8% while the domestically-focused mid-caps index was up 0.4%

Credit Suisse Group AG rose 2.6% after JPMorgan upgraded the Swiss bank's stock to "neutral" from "underweight".

Shell fell 2.8% after the oil major said its third-quarter profits would be weakened by a sharp drop in refining margins and "significantly" weaker earnings from natural gas trading.

($1 = 0.8847 pounds)

(Reporting by Devik Jain and Amruta Khandekar in Bengaluru; editing by Uttaresh.V and Mark Heinrich)