ECB Hikes Rates Amid Ongoing Energy-Driven Inflation Pressures

The European Central Bank (ECB) has delivered a widely expected 25 bps hike in interest rates, but with a more hawkish tone than anticipated. UOB economist Lee Sue Ann notes that policymakers stressed the ongoing inflation pressures from the Middle East-driven energy shock, which continues to pose risks to the upside for inflation despite increased uncertainty around growth.

The ECB raised its three key policy rates by 25 bps, taking the interest rates on the deposit facility, main refinancing operations, and marginal lending facility to 2.50%, 2.65%, and 2.90%, respectively. The decision was seen as a response to the persistent energy-driven inflation risks and growing concerns over second-round effects through wages and underlying prices.

While the October meeting is now considered a live possibility for another rate hike, UOB still expects one final 25 bps increase in December, taking the deposit rate to 2.75%. The key risk to this view is a further escalation in energy prices or clearer signs that second-round effects are becoming entrenched, which could compel the ECB to move sooner.