ECB set to raise rates in September but signals pause after
ECB policymakers plan a September rate hike to 2.50% to counter Iran-war inflation, but are unlikely to signal further tightening.
European Central Bank policymakers are preparing to raise interest rates at their September meeting, aiming to curb inflationary pressures stemming from the ongoing Iran conflict. However, according to sources familiar with the matter, there is little appetite among officials to signal additional tightening beyond that move.
The ECB already lifted borrowing costs in June for the first time in nearly three years, a step taken to prevent war-induced energy price spikes from becoming entrenched in the broader economy. With inflation hovering near 3% and the Iran conflict unresolved, governors believe the time is right for another increase, bringing the policy rate from 2.25% to 2.50%.
The sources, who spoke on condition of anonymity, noted that the hike was already factored into the ECB's economic projections in June. They see it as a demonstration of resolve to avoid a repeat of the severe inflation that followed Russia's invasion of Ukraine in 2022.
Rising natural gas prices and high petrol costs were cited as key drivers of inflation. At the same time, the euro zone economy is performing better than expected, with output data and business surveys suggesting that the ECB's efforts to rein in price growth are not unduly hurting activity.
Despite these pressures, long-term inflation expectations remain well anchored at the ECB's 2% target. Policymakers therefore see no need to hint at further tightening in September, even though financial markets currently anticipate one or two additional hikes.
A clearer picture will emerge when August inflation data is released next week, followed by the ECB staff's updated economic projections at the September 9-10 meeting.