Key facts
- The European Central Bank is expected to raise interest rates by 25 basis points to 2.50% on Thursday.
- Soaring oil and gas prices, driven by the Iran conflict, are fueling fresh inflation fears in the euro zone.
- The ECB may signal further tightening if the inflation outlook does not improve.
- The euro zone economy has shown resilience, with bank lending picking up in July.
- The ECB is expected to raise its growth projections but push back the timeline for inflation returning to its 2% target.
The European Central Bank is widely expected to raise interest rates on Thursday for the second time this year, as escalating conflict in Iran sends oil and gas prices soaring and reignites inflation concerns across the euro zone.
Attacks on military, shipping, and energy assets since late August have shattered a period of calm, prompting fears of a new wave of price hikes in the fuel-importing euro zone. Economists anticipate the ECB will lift its key policy rate to 2.50% from 2.25% and signal a readiness for further tightening if the inflation outlook fails to improve.
Policymakers are likely to draw comfort from recent economic data showing the 21-country euro zone economy has performed better than expected, with bank lending even accelerating in July. This resilience suggests the ECB's previous rate hike has not yet significantly dampened economic activity, providing scope for further monetary tightening if necessary.
While the ECB is also projected to increase its growth forecasts for this year and potentially 2027, it is expected to delay the timeline for inflation returning to its 2% target, which was previously anticipated for next summer. The latest forecasts may not fully account for the recent surge in Brent crude prices, which touched $100 a barrel.
Analysts warn that higher fuel costs, trade tensions, and weather-related disruptions could lead to further inflation, potentially compelling the ECB to consider additional rate hikes in October and December. Despite a recent easing in core inflation and consumer expectations, underlying inflationary pressures are seen as building, particularly in core goods and producer prices.
Beyond monetary policy, ECB President Christine Lagarde is expected to face questions regarding her tenure, which concludes in October 2027, and recent reports about potential reshuffles within the central bank's leadership.