ECB set to hike as Iran war fuels fresh inflation fears

By Francesco Canepa and Balazs Koranyi FRANKFURT, Sept 10 (Reuters) - The European Central Bank (ECB) is expected to raise interest rates to 2.50% from 2.25% on Thursday, signaling readiness for further tightening if inflation does not improve. This follows escalating tensions in the Iran war, which have sent oil and gas prices soaring, reigniting fears of inflation in the euro zone.

Economists, including Alessia Berardi from Amundi Investment Institute, predict a September hike is inevitable, with inflation remaining elevated and likely to persist before easing toward the second half of next year. The ECB’s President Christine Lagarde and colleagues are likely to take comfort from recent economic resilience, with the euro zone economy holding up despite higher fuel costs, China’s competition, and drought impacts. Bank lending even increased in July, suggesting the ECB’s June rate hike did not yet dampen activity.

Financial markets anticipate two or three more rate hikes by the end of next year, as long-term bond yields rise, reflecting inflation concerns and government debt worries. Competition from tech companies raising funds for AI and political turmoil in Germany further tightens financing conditions.

On Thursday, the ECB is also expected to revise its growth and inflation projections, possibly extending the timeline for inflation to return to its 2% target from next summer. Brent crude prices recently hit $100 a barrel, adding to inflationary pressures. Lorenzo Codogno of LC Macro Advisors warns of another inflation spike due to fuel costs, trade tensions, and weather disruptions, potentially forcing further ECB tightening in October and December.

Key indicators like core inflation (2.4% last month) and consumer expectations have shown signs of easing, but underlying inflationary pressures remain. Core goods prices are rising faster than consumer prices, and producer prices are climbing, signaling potential future inflationary effects. Carsten Brzeski of ING notes that companies in Germany have absorbed higher costs better than in 2022, but the risk of broader inflation persists.

Beyond the rate decision, Lagarde may face questions about her future at the ECB, with speculation linking her to the World Economic Forum and potential early departure by 2027. A report suggesting ECB board member Isabel Schnabel may join the International Monetary Fund could signal a reshuffle at the bank.

Source: Euronext Markets: Real-time Stock Market Data | live