ECB Poised for Second Rate Hike as Energy-Driven Inflation Bites

(MENAFN) The European Central Bank (ECB) is preparing to deliver its second interest rate hike of the year as inflationary pressure, driven largely by surging energy costs, builds across the eurozone. Markets are now fixated on the bank's updated economic projections and forthcoming remarks from ECB President Christine Lagarde.

Oil prices have climbed back above $100 a barrel amid the ongoing Middle East conflict, while European natural gas prices have surpassed 2023 levels. Eurozone inflation, fueled by the energy spike, hit a three-year high of 3.3% in August.

Peter Vanden Houte, chief economist at ING Group, told media that the bank is expected to raise its deposit rate by 25 basis points to 2.5%, citing the resilience of the eurozone economy and the return of inflation above 3% driven by elevated energy costs.

Houte said core and services inflation have not yet flashed broader warning signs, since the current pressures remain largely tied to energy — a dynamic that could keep the ECB from striking an overly hawkish tone at its upcoming meeting.

"We expect the ECB's new projections to contain only modest upward revisions to growth and inflation forecasts," he said. "Although financial markets are pricing in further rate increases later this year, we are a bit more cautious."

He added that the central bank may shift into a wait-and-see mode following this month's hike.

"Only if the Middle-East conflict drags on, potentially pushing energy prices even higher, the ECB might consider hiking rates again in December," he added.

Bill Diviney, head of macro research and senior eurozone economist at ABN AMRO, told Anadolu that markets will be closely watching the bank's revised macroeconomic forecasts and Lagarde's comments, with an upward revision expected to the ECB's 2027 inflation outlook.

"Lagarde will likely be pressed on the prospect of future moves given that markets are pricing in nearly two more hikes after September's move, but while we expect hawkish rhetoric around inflation, she is likely to reiterate the ECB's meeting-by-meeting approach," he said.

Alain Durree, head of European macro research at Natixis, said Lagarde is likely to strike a neutral tone in the near term, preserving flexibility while steering clear of signaling an extended tightening cycle.

Durree said he does not expect the ECB to pause its rate-hiking campaign until the end of 2027.

"First, a resolution of the Middle East conflicts by early January should ease energy prices. Second, softening labor market conditions by then will limit the risk of second-round effects," he said.

"Third, the projected appreciation of the euro will further dampen both headline and core inflation," he added, pointing to these three factors as reasons the bank is likely to keep hiking despite a complicated economic picture heading into the fall.

Marco Wagner, senior economist at Commerzbank, told Anadolu that the ECB's path forward after this month's hike remains "less certain."

"Investors in the futures markets expect two more rate hikes by the middle of next year; however, we consider it more likely that key interest rates will remain unchanged in the coming months," he said.

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