ECB Prepares for Another Interest Rate Hike Amid Resilient Euro Zone Economy

The European Central Bank (ECB) is expected to raise interest rates in September to combat inflation, but policymakers show little inclination for further tightening, according to sources familiar with the matter.

The ECB raised borrowing costs for the first time in nearly three years in June to prevent war-driven energy price increases from spreading across the economy. With inflation near 3%, the ongoing Iran conflict, and signs of resilience in the euro zone economy, ECB governors believe it is time to raise the policy rate again, from 2.25% to 2.50%.

Policymakers pointed to rising natural gas prices, a key fuel for the energy-importing euro zone, and high petrol prices at the pump as primary drivers of inflation. They also argued that the euro zone economy is performing better than expected, as indicated by output data and business surveys, suggesting that the ECB's efforts to curb price increases are not placing undue strain on economic activity.

However, long-term inflation expectations remain well anchored at the ECB's 2% target, and policymakers see no need to hint at further tightening in September. Financial markets currently expect one or two additional hikes.