The European Central Bank (ECB) is expected to raise interest rates again in September to contain inflationary pressures linked to the ongoing Iran conflict, although policymakers have little appetite to signal further tightening, according to three sources familiar with the matter.
The ECB is expected to lift its policy rate to 2.50% from 2.25% at its Sept 9-10 meeting, with inflation running close to 3%, the euro zone economy showing resilience and the conflict continuing to push up energy costs.
Policymakers are particularly concerned about higher natural gas and petrol prices, which could fuel broader inflation across the energy-importing euro zone. The sources said the economy has also been performing better than expected, with recent output data and business surveys pointing to continued activity.
The expected hike would follow the ECB’s first rate increase in nearly three years in June, when it raised borrowing costs to prevent a war-driven surge in energy prices from spreading more widely through the economy.
However, the sources said policymakers do not currently see a need to signal another increase beyond September. Long-term inflation expectations remain anchored around the ECB’s 2% target, limiting the case for communicating a more aggressive tightening path.
Financial markets are currently pricing in one or two additional rate increases, but policymakers are expected to take a more cautious approach and await further data before deciding on their next steps.
The ECB will receive August inflation data next week before its staff present updated economic projections at the September meeting, giving policymakers a fuller picture of the inflation outlook and the impact of higher energy prices.
The sources said the September hike would also demonstrate the ECB’s resolve to prevent a repeat of the severe inflation episode that followed Russia’s invasion of Ukraine in 2022.
An ECB spokesperson declined to comment.
