ECB Hikes Rates Amid Energy Price Surge

The European Central Bank (ECB) has announced a widely expected 25-basis-point rate hike, increasing the deposit facility rate from 2.25% to 2.50%. This move is in response to renewed inflation pressures caused by surging energy prices.

Brent crude has moved back above $100 a barrel due to the US-Iran conflict and disruptions to shipping in the Middle East, leaving eurozone inflation running above 3%, well above the ECB's 2% medium-term target. This creates an uncomfortable policy mix for the ECB as higher oil and gas prices lift inflation while threatening economic growth.

Thursday's communication is crucial as any evidence of higher energy costs spreading into service prices, wages, or inflation expectations would strengthen the case for additional hikes. Economists are split on whether this will be the final hike, with some expecting a 25-basis-point increase in December, taking the terminal deposit rate to 2.75%.

The euro-dollar pair will also trade on the relative rate outlook between the ECB and Federal Reserve, rather than the ECB decision in isolation. The Fed currently maintains its policy rate at 3.50%-3.75%, with around 70% of economists expecting it to remain on hold at its 15-16 September meeting.