The European Central Bank is widely expected to hike interest rates by 25 basis points to 2.5% on Thursday, acting with caution as the ongoing U.S.-Iran conflict sustains elevated oil prices and rekindles inflation, as reported by Reuters journalists Dhara Ranasinghe and Stefano Rebaudo. Brent crude has climbed over the last month, while European gas prices have hit their highest level since early 2023, tightening financial conditions and driving euro zone inflation back above 3% in August.
Why the September Rate Hike Is a Done Deal
Traders have fully priced in a quarter-point move for the upcoming meeting, echoing minutes from the July gathering. Sources told Reuters that policymakers are ready to move again as higher energy costs filter into headline figures. “We expect the ECB to hike rates by 25 basis points. Another insurance rate hike,” said ING global head of macro Carsten Brzeski, or “a dovish rate hike” for those who prefer that framing.
Will the ECB Hike Rates Again After September?
Policymakers currently show little appetite to signal further rate increases beyond this week. Traders still anticipate a high chance of another move by December and one more next year, reflecting ongoing energy cost pressures, but most economists believe room for further rises is limited because it could hurt economic growth. Economists polled by Reuters think the ECB will be done after September, especially as there are no signs yet that energy-driven inflation is broadening. Services inflation dropped in August, the labour market remains soft, and wage growth is still slowing.
“The hot topics for investors will be comments about indirect (inflation) effects and second round effects, how intensely and with what time delay energy prices will eventually translate into core inflation,” said Commerzbank economist Marco Wagner, pointing to the high uncertainty surrounding the transmission delay.
What New ECB Projections Reveal About Growth and Inflation
Economists expect inflation and growth forecasts to remain broadly unchanged in the central bank’s updated projections, though some anticipate GDP estimates could be nudged higher. While high gas and oil prices keep upward pressure on inflation, recent data shows the economy has held up better than anticipated. Euro zone business activity posted solid growth in August, matching July’s pace, which marked the fastest expansion of the year according to S&P Global data. “They (the ECB) will probably revise up their 2026 growth forecast slightly,” said SEB macro economist Pia Fromlet.
Did you know?
Rohan Khanna, head of euro rates strategy at Barclays, noted that prior to this, the last instance of a globally coordinated intervention in the yen occurred following the 2011 Fukushima earthquake and tsunami, recalling that the ECB participated in that euro-yen intervention.
How U.S. Interventionism and Yen Purchases Impact the ECB
Recent U.S. actions involving selling euros to buy yen—coupled with U.S. Treasury bond-buying interventions—do not directly dictate ECB policy, but sources told Reuters they worry European central bankers as a sign of an increasingly interventionist U.S. approach that breaks with historical norms. European officials also expressed annoyance that Washington did not give them a customary heads-up that sales of euros, rather than dollars, formed part of the yen-bolstering intervention. “So I feel the grievance is more to do with being blindsided,” Barclays strategist Rohan Khanna noted.
Bond Selloffs and Financial Conditions Across Europe
Rising global borrowing costs, driven by resurgent energy prices and persistent concerns over high government debt, have tightened financial conditions and effectively done some of the ECB’s work. Ten-year borrowing costs in France—which faces a perilous annual budget battle—and in Italy are up around 65 basis points each this year, while German yields have climbed 50 basis points. Michael Metcalfe, head of macro strategy at State Street, noted that big central banks will face questions about rising global yields. “The ECB is always careful in how it talks about long-dated bonds and is likely to stress that only if the moves are out of line with the fundamentals are they likely to act,” Metcalfe said. “That doesn’t seem to be the case.”
Frequently Asked Questions
Is the ECB guaranteed to raise interest rates this week?
Yes, sources told Reuters the ECB is ready to raise rates by 25 basis points to 2.5%, and traders have fully priced in the move following August inflation data.
What is driving the latest euro zone inflation spike?
According to recent economic data, resurgent energy costs driven by the ongoing U.S.-Iran war and rising natural gas prices pushed euro zone inflation back above 3% in August.
Will the ECB continue hiking rates into next year?
Most economists polled by Reuters expect the ECB to pause after September because the labor market is soft, wage growth is slowing, and further hikes could damage economic growth.
Stay Ahead of Central Bank Shifts
Get regular updates on European monetary policy, inflation trends, and currency markets delivered directly to your inbox.