The European Central Bank (ECB) is poised to increase interest rates for the second time since the Iran war caused energy prices to surge, locking inflation well above its target. A Bloomberg poll indicates that all but one analyst anticipate a quarter-point hike in the deposit rate to 2.5% on Thursday. New quarterly forecasts are expected to support this action by showing stronger inflationary pressures alongside faster economic growth across the 21-nation euro area.
This expected rate hike comes as energy prices continue to climb, with Brent crude testing $102/b, matching its highest level since late May, and European gas prices surpassing €80/MWh for the first time since January 2, 2023. These escalating energy costs are deepening concerns about inflation, prompting markets to brace for a more hawkish ECB stance. The euro's value remains stable, trading between 1.16 and 1.1650 against the dollar.
In response to these developments, eurozone government bond yields have risen, with the 10-year German Bund yield reaching a new 15-year high of 3.400%. The 10-year U.K. gilt yield also increased by 4.6 basis points to 5.207%. Investors are particularly attentive to the ECB's updated staff forecasts, especially for core CPI, as these will indicate whether the current market pricing for a "profound" tightening scenario is justified, moving beyond the ECB's previous "gradual" tightening response to its "adverse" scenario. The market is pricing in a 25 basis point hike, aligning with expectations that the ECB's deposit rate will reach 2.50%.
