ECB set to hike interest rates as Iran war flares anew

FRANKFURT

The European Central Bank is expected to raise interest rates again this week as renewed fighting in the Middle East pushes up energy costs and risks further stoking inflation.

Inflation in the 21-nation eurozone, which is heavily dependent on energy imports, hit a three-year high of 3.3 percent in August, substantially above the ECB’s 2 percent target.

And with fears growing prices will spiral even higher, the central bank is set to hike its benchmark rate for the second time this year when it meets on Sept. 10.

“The ECB governing council looks certain to raise its deposit rate from 2.25 percent to 2.5 percent,” said Andrew Kenningham, chief Europe economist at Capital Economics.

The ECB in June delivered its first hike since 2023 to tame surging prices, but then hit pause at its last meeting in July to see how the conflict would develop.

The eurozone economy has also proved resilient, growing faster than expected in the second quarter, leaving policymakers with some room to lift borrowing costs without inflicting major damage.

The ECB will be armed with fresh growth and inflation forecasts for the next few years to guide its decision, although analysts don’t expect major changes to the projections.

Despite rising inflation, some economists nevertheless believe a rate hike is not the right decision.

“We consider another hike a mistake because there is almost no evidence of knock-on effects,” Felix Schmidt, senior economist at Berenberg bank, told AFP.

“You can’t tackle a supply shock with tighter monetary policy.”