ECB Hikes Rates Amid Iran War Fuelled Inflation Concerns

The European Central Bank (ECB) raised interest rates for the second time this year on Thursday, aiming to combat inflation driven by higher energy costs from the Iran war. The euro weakened by 0.3% to around $1.159, and euro zone government bond yields edged up to fresh multi-year highs following the decision.

The oil price surged by more than 4% to $105.3 a barrel, adding to investor concern about a sustained pickup in inflation.

Mark Wall, Chief European Economist at Deutsche Bank, noted that 'the inflation risks may be rising and a further hike in December may be more likely than not.' He emphasized the need for caution, as the economy has been resilient over the last six months but is facing negative supply shocks from rapidly rising gas prices.

However, Patrick Ernst, Macro Investment Strategist at JPMorgan Private Bank, believes that 'another hike before year-end is no longer a tail risk.' He highlighted that the ECB's decision to keep the door open for further tightening suggests that policymakers are concerned about an energy-led inflation risk.