Britain · UK News PostBy Francesco Canepa and Balazs Koranyi - The European Central Bank (ECB) is expected to raise interest rates on Thursday, marking the second hike this year, as inflation fears intensify due to the Iran war. Attacks by both sides since late August have disrupted stability, raising oil prices above $100 per barrel and prompting concerns about further fuel price hikes in the euro zone. Economists predict the ECB will increase its policy rate to 2.50% from 2.25%, signaling readiness for further tightening if inflation does not improve. "A September hike looks all but locked in," said Alessia Berardi, head of global macroeconomics at Amundi Investment Institute. "Inflation remains elevated and should stay sticky over the next few months before easing toward the second half of next year."
Resilient economic data provides some comfort. The 21-country euro zone economy has shown stronger-than-expected growth despite rising fuel costs, competition from China, and drought impacts. Bank lending even increased in July, suggesting the ECB’s June rate hike did not dampen activity, offering policymakers room for further tightening if needed. "We expect President Lagarde to maintain a hawkish wait-and-see stance," Martin Wolburg, senior economist at Generali Investments, noted. Financial markets anticipate one more rate hike this year, followed by potential moves next year, though economists suggest Thursday’s decision may be the last for now.
The ECB is also expected to raise growth projections for 2024 and possibly 2027, reflecting economic resilience. However, inflation projections may be pushed back, as it remains above 3%, far from the 2% target. Recent gas price surges have worsened the situation, with gas prices now trading between adverse and severe scenario assumptions. "Gas price shocks tend to feed through more slowly than oil shocks but also generate larger and more persistent effects on non-energy inflation," Barclays noted.
Key indicators remain relatively stable. Core inflation, excluding energy and food, eased to 2.4% last month, and consumer price expectations have decreased. Wage growth has also moderated. "Unlike the 2022 energy shock, this year’s surge is unlikely to trigger a wage-price spiral," Andrew Kenningham at Capital Economics said. Carsten Brzeski, global head of macro at ING, added that companies, especially in Germany, have absorbed higher costs better than in 2022, when energy shocks pushed inflation above 10%.
Beyond the rate decision, ECB President Christine Lagarde may face questions about her future tenure, which ends in October 2027. She has been linked to potential leadership roles at the World Economic Forum and expressed interest in championing European values in the upcoming French presidential election. A report suggesting ECB board member Isabel Schnabel may join the International Monetary Fund could signal a reshuffle at the ECB.
Source: Euronext Markets: Real-time Stock Market Data | live
