ECB set for another rate hike as energy costs push inflation higher

The European Central Bank is set to raise interest rates again on Thursday, with traders fully pricing in a quarter-point increase to 2.5%. The move comes as rising oil and gas prices, exacerbated by the ongoing U.S.-Iran conflict, have pushed euro zone inflation back above 3% in August.

Economists describe the expected move as an "insurance" hike, aimed at preempting further price pressures. However, there is little appetite among policymakers to signal additional increases beyond September. Most analysts polled believe the ECB will pause after this week, though traders see a high chance of another move by December or next year, depending on energy costs.

The bank's latest economic projections are due alongside the decision. Forecasts for growth and inflation are likely to remain broadly unchanged, though some economists expect a slight upward revision to 2026 GDP estimates, as recent business activity data has been stronger than anticipated.

Beyond the immediate rate decision, investors will focus on how the ECB addresses the indirect effects of energy prices on core inflation. Officials are also wary of recent U.S. intervention in currency and bond markets, which some European policymakers feel was conducted without proper consultation.

Rising global bond yields have tightened financial conditions, potentially doing some of the ECB's work. However, central bank officials are expected to stress that they will only act if yield moves appear out of line with fundamentals.