Markets expect the ECB to raise its rate by at least 25 basis points
The European Central Bank is expected to raise its key interest rate by at least 25 basis points on Thursday. Markets put the probability of such a decision at 100%, CNBC Top News reports. At the same time, the future path of monetary policy remains uncertain because of the war between the United States and Iran.
Inflation exceeds the ECB’s target
The ECB’s September meeting follows the release of eurozone inflation data: it stood at 3.3% in August, while energy price growth reached 14.3%. The eurozone is a net energy importer, and inflation has exceeded the ECB’s 2% target since the war in the Middle East threatened the transportation of commodities through the Strait of Hormuz.
The escalation of the conflict has also caused a sharp rise in the cost of government borrowing. Yields on European government bonds have reached multi-decade highs in recent weeks as investors price in the risks of higher inflation and further rate increases.
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Forecasts for further steps differ
In June, the ECB raised its rate to 2.25% for the first time since 2023. ECB President Christine Lagarde then spoke of risks of accelerating inflation and risks to economic growth, stressing that the regulator was not committing itself to a specific rate path. At the following meeting, the bank left the rate unchanged and said it was closely monitoring the scale and duration of the energy shock, as well as its indirect and second-round effects.
Aberdeen economist Felix Feather considers a rate increase almost inevitable and expects hawkish rhetoric from the ECB. At the same time, in his assessment, the rate could remain at 2.5% for an extended period after the meeting if the United States and Iran ease tensions, which could reduce pressure on energy markets.
A Deutsche Bank client survey found no consensus on the terminal rate. More than a third of respondents expect it to rise to 2.75%, a quarter forecast only one additional increase, and about another quarter allow for the cycle to end at 3%, which would imply three more increases.
