ECB Eyes Another Rate Hike Amid Inflation Concerns

Investors are bracing for another interest rate hike from the European Central Bank (ECB) at its upcoming meeting, with ING predicting a 25 basis point increase.

The ECB's policymakers have been weighing persistent energy-driven inflation against signs of economic resilience in the eurozone. According to Carsten Brzeski, global head of macro research at ING, the case for a hike has strengthened since July, when some ECB members advocated for one. The eurozone economy has shown 'an almost unexpected resilience' to the war in the Middle East, partly due to Asian competitors losing orders to European rivals following the closure of the Strait of Hormuz.

Headline inflation remains above 3% year-on-year and is expected to stay there for the rest of the year. While core and services inflation do not provide a reason for panic, Brzeski noted that it would be difficult for most ECB policymakers not to see a case for another hike, especially with elevated risks and the possibility of a fresh shock.

The new round of ECB staff projections is expected to revise growth and inflation forecasts slightly higher, due to earlier upward revisions to first-quarter growth and higher oil prices. However, whether the ECB extends its hiking cycle beyond September remains uncertain. Markets have started pricing in at least one more hike before year-end, and views within the ECB appear to be diverging.

Brzeski noted that after next week's hike, the deposit rate would remain at 2.5%, which is considered neutral by the ECB. He added that going further would suggest the ECB views restrictive policy as necessary, but questioned whether this would be justified given the economy's resilience and public finance woes.

The recent surge in bond yields is also expected to feature in next week's discussion. Brzeski warned that excessive or uneven tightening across eurozone countries could create new problems, and flagged growing attention to debt sustainability concerns, particularly ahead of next year's French presidential election.