The ECB has raised interest rates for the second time since the war with Iran began in February, responding to signs that inflation will remain well above 2%. On Thursday, the deposit rate was increased by a quarter of a percentage point to 2.5%, matching the forecasts of nearly all economists surveyed by Bloomberg.
The ECB emphasized that it is not making any prior commitments regarding future moves, noting that it will decide on a meeting‑by‑meeting basis depending on incoming data. “The conflict in the Middle East continues to create inflationary pressure, and inflation will remain significantly above the target level for an extended period,” the regulator said in a statement. The ECB assessed the economic outlook as highly uncertain, with risks to inflation tilted to the upside, while risks to economic growth are tilted to the downside.
Response to rising energy costs
The ECB’s decision means eurozone policymakers are ahead of their counterparts in other major economies in responding to the surge in energy prices, which has driven the fastest inflation growth in nearly three years. Traders expect further monetary tightening: following the announcement, they increased bets on additional hikes and are now pricing in three more rate increases by October 2027.
President Christine Lagarde told reporters in Berlin that economic growth from April through June was broad‑based across countries and sectors.
“This trend likely continued into the third quarter,” she added. At the same time, she warned that higher energy costs would gradually feed into core inflation and food prices.
“The conflict in the Middle East and recent developments in Russia’s unjustified war against Ukraine have pushed energy prices even higher,” she stated. According to her, this is likely to keep headline inflation well above the target level through the first half of 2027.
Oil has risen to $105 per barrel, and natural gas prices in Europe have reached levels last seen in the winter following the start of Russia’s full‑scale invasion of Ukraine. Against this backdrop, consumer prices in the 21‑country currency bloc rose by 3.3% year‑on‑year in August.
Outlook for further rate hikes
Such figures may reassure ECB officials, who stated at the July meeting that a “moderately restrictive” monetary policy might be needed to return inflation to the target level.
To bring inflation back to the target, the deposit rate will likely need to be raised above 2.5%. Currently, this level sits at the upper end of the range widely considered neutral for economic activity.
Member of the Governing Council of the ECB from Lithuania Gediminas Simkus has already said the regulator is unlikely to finish raising rates after this week. His Bulgarian colleague Dimitar Radev called the December meeting “open” for a possible decision.
Unexpected economic resilience may facilitate further monetary tightening. Output grew by 0.6% from April through June following a significant revision of data for Ireland.
Meanwhile, the manufacturing sector is expanding at its fastest pace in more than four years. This is supported by investments in digitalization and government spending on infrastructure and defense.
Head of Eurozone Economics at Moody’s Analytics Kamil Kovar noted that the ECB’s acknowledgment of the economy’s unexpected strength, combined with forecasts for faster inflation growth, shows the Governing Council is prepared for further rate hikes.
Source: Bloomberg
