The European Central Bank looks set to raise its policy rate to 2.50% on Thursday, its second hike this year, as the Iran war drives oil and gas prices back up. Economists expect ECB President Christine Lagarde to signal readiness for further tightening even as underlying inflation data stay benign.
The European Central Bank looks set to raise its policy rate to 2.50% from 2.25% on Thursday, its second increase this year. Renewed attacks between the U.S. and Iran since the end of August have hit military, shipping and energy assets, sending oil and gas prices soaring again.
Iran war revives inflation fears
Brent crude touched $100 a barrel on Wednesday, a move the ECB's Thursday forecasts are unlikely to fully capture.
According to Reuters: Alessia Berardi, head of global macroeconomics at the Amundi Investment Institute, said "A September hike looks all but locked in." Financial markets are pricing in another two or three hikes by the end of next year.
Resilient economy gives policymakers room
Lagarde and her colleagues are gathering in Berlin for their annual venture away from ECB headquarters, and they are likely to take comfort from recent growth data. The euro zone economy has been holding up better than anticipated despite higher fuel costs, competition from China and the impact of droughts, and bank lending even picked up pace in July.
But financing conditions have already tightened as long-term bond yields scale highs not seen since before the global financial crisis, reflecting inflation concerns and worries about ballooning government debt. Competition from bond sales by big tech companies funding the AI boom, and political turmoil in Germany, have added to the pressure on yields.
Core data still benign, for now
Core inflation eased to 2.4% last month, and consumers have trimmed their expectations for price growth. Yet analysts at Barclays cautioned that pressure is quietly building beneath the surface, with core goods prices gaining momentum and producer prices rising far faster than consumer prices. Lorenzo Codogno, founder of LC Macro Advisors, said higher fuel costs, trade tensions and weather-related disruptions could force the ECB to tighten again in October and December.
Beyond the rate decision, Lagarde is likely to face questions on her own tenure, which runs until October 31, 2027. A report last week suggesting ECB board member Isabel Schnabel was in talks to join the International Monetary Fund could herald a reshuffle at the top of the euro zone's central bank.
Source: Investing.com
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