ECB to hike interest rates again as Iran war fans inflation

According to fresh market updates, The European Central Bank is set to mobilize borrowing costs for the second time since the Iran war sent energy prices soaring, with inflation locked well above target and the region’s economy proving surprisingly robust.

The deposit rate will be lifted by a quarter-point to 2.5% on Thursday, according to all but one market observer in a Bloomberg poll. New quarterly forecasts will bolster the case for action by pointing to stronger inflation pressure alongside faster expansion in the 21-nation euro area.

Policymakers are battling consumer-price upside that breached 3% last month, an almost three-year high that’s unlikely to recede much in the months ahead. In a break from peers including the The US central bank and the Bank of England, the ECB increased rates in June, and there’s little disagreement over another move the current week.

What happens next is far less certain. Markets see two or more additional hikes, while economists are skeptical. ECB officials are divided too: Some say rates may need to climb further after this month, but others urge caution in the absence of second-round inflation effects and lingering risks from the Middle East and US trade.

“The ECB will obviously hike the current week,” stated Jari Stehn, chief European economist at Goldman Sachs. “But huge uncertainty around the outlook and some signs of a split in the Governing Council mean it’s likely to leave the rate outlook completely open.”

The policy announcement is due at 2:15 p.m. in Berlin, with this meeting being the one per year that the ECB holds outside its Frankfurt base. President Christine Lagarde will face journalists in the German capital 30 minutes later.

Officials have widely telegraphed September’s rate gain, which will cement the ECB’s status as the most hawkish central bank within the Group of Seven.

But divisions have emerged over what will follow. Lithuania’s Gediminas Simkus has stated hiking to 2.5% won’t be enough to return inflation to 2%, citing firmer expansion, among other factors. Executive Board member Piero Cipollone, in the meantime, has warned the ECB shouldn’t tighten excessively, to avoid economic harm.

That’s partly because 2.5% is widely noted as the upper limit of a neutral range beyond which activity becomes restrained. Not everyone agrees, though. Ireland’s Gabriel Makhlouf argues restrictive territory would start only above 2.75%.

Bundesbank President Joachim Nagel has stated officials must additionally consider the recent climb in global bond yields, which “complicates the situation,” even as tighter financial conditions help the ECB curb inflation.

New projections will be crucial for Thursday’s deliberations and the path for rates beyond. The ECB is additionally anticipated to publish alternative scenarios again, like it did in March and June.

In terms of the baseline, market watchers foresee an upward revision to next year’s inflation forecast, from 2.3% in June. For 2026, they anticipate an unchanged projection of 3%, and stronger economic expansion.

“Unless the 2028 forecast is below target, especially on core and ex-energy inflation, it will validate the total of a bit more than three hikes that are factored into the projections,” JPMorgan economist Greg Fuzesi stated in a note.

Officials must, that stated, keep in mind that their estimates are likely to already be somewhat outdated. With a trimmed-off date in August, the outlook probably won’t reflect the latest surge in bond yields or loftier energy prices.

Speculation around Lagarde leaving the ECB early is mounting, with her remarks after July’s rate meeting amounting to the most explicit message yet that she won’t stay until her term ends in October 2027.

Bloomberg noted last month that the World Economic Forum, known for its annual gathering in Davos, is still courting her to take over and that Lagarde, who’ll publish her memoir in late January, appears ready to accept the role.

Lagarde additionally recently declined to rule out a role in French politics, “in whichever capacity I will be most efficient.” Shortly after her trip to Berlin, she’ll be guest of honor at an annual political gathering organized by Hervé Morin, president of the Normandy region and leader of the Les Centristes party.

Pressure on Lagarde to clarify her future could ramp up if Executive Board member Isabel Schnabel leaves the ECB prematurely. The German official, whose term runs to late 2027, may switch to the International Monetary Fund.