ECB set to hike again on Thursday as the oil shock feeds euro-area inflation

The European Central Bank is widely expected to raise interest rates on Thursday, erring on the side of caution as the US-Iran war drags on¹. Markets fully price a 25 basis point rate hike as the ECB aims to prevent second-round effects², and a quarter-percentage-point increase is seen as a near certainty³. Morningstar’s market open note put the same 25 basis point hike on Thursday’s agenda⁶.

The expected landing point is a policy rate of 2.75%^4,8. Futures imply a 75% chance of a further hike to 3.0% by December⁴. Deutsche Bank now expects the ECB to raise rates by 25 basis points in December in addition to a September hike⁵. The bank is seen as certain to lift rates because of the inflationary impulse from still-elevated oil prices⁸, and the renewed fighting in the Middle East is the reason given for the move¹².

The case against is not silent

The Financial Times reported few signs of persistent price pressures in the UK and the eurozone, with rate-setters at the ECB and the Bank of England watching the data for indirect and second-round effects¹¹. That sits awkwardly beside the ECB’s stated aim of pre-empting exactly those effects², and beside the framing that the hike is insurance rather than a response to realised inflation¹.

Markets are already repricing around it. European bond yields rose amid fears over Middle East tensions, and higher inflation would further crimp the tight fiscal space of under-pressure governments across the continent¹⁰. European shares sagged on Tehran’s Hormuz zone plan and the imminent ECB decision, with the pan-European STOXX 600 among the indices affected⁷, while European stocks dipped as an oil rise offset technology gains ahead of the US CPI report⁹.

Why it matters to investors

A central bank tightening into an energy shock rather than a demand boom is making a judgement about expectations, not about growth. The ECB is hiking to stave off energy-driven inflation⁹ and to stop pass-through into wages and other prices².

For euro-denominated assets the discount rate is moving twice: once on Thursday and, on current pricing, probably again before year end^4,5. The fiscal channel matters too, because higher yields tighten the room governments already lack¹⁰. The US inflation reading due later in the week is the other input traders are waiting on^6,9.