The European Central Bank (ECB) is poised to increase interest rates by a quarter of a percentage point on Thursday, elevating its main rate to 2.5%. This move is largely driven by escalating inflation, which currently stands at 3.3% in the euro zone, significantly above the ECB's 2% target. The decision comes as the price of crude oil has once again surpassed the $100 per barrel mark, exacerbated by the ongoing conflict in Iran which has seen attacks on military, shipping, and energy assets by both sides since late August.
Analysts widely anticipate this rate hike, which would mark the second increase this year. Financial markets are already pricing in at least two to three more hikes by the end of next year. Economists from institutions like Amundi Investment Institute and Generali Investments expect the ECB to signal a readiness for further tightening if inflation persists. This sentiment is reinforced by traders who are increasing bets on ECB rate hikes, with swaps pricing suggesting approximately 90 basis points of increases by December 2027, equating to three quarter-point hikes.
The euro zone economy has demonstrated unexpected resilience, despite higher fuel costs and competition from China. Bank lending even saw an uptick in July, indicating that the previous rate hike in June had not yet stifled economic activity. The ECB is also expected to revise its growth projections upwards for this year and potentially 2027. However, the timeline for inflation to return to its 2% target might be pushed back, as the current forecasts are unlikely to fully capture the latest energy price surge. ING's Chief Economist, Marieke Blom, suggests that one rate hike "could be enough" given subdued core inflation, services, and wage pressures, a view contrasting with the market's more hawkish expectations. Nevertheless, other analysts caution that underlying inflationary pressures, particularly in core goods and producer prices, are building.
The rate increase will have direct implications for consumers, with tracker mortgage customers facing an increase of about €13 per month for every €100,000 borrowed. This will also exert upward pressure on other mortgage rates. Conversely, savers might benefit from higher returns. ECB President Christine Lagarde's post-decision remarks will be closely scrutinized for any indications about future rate adjustments and guidance on the inflation outlook. There are also discussions circulating about Lagarde's future beyond her current tenure, with speculation linking her to roles outside the ECB.
