ECB Prepares for Second Interest Rate Hike as Oil Prices Soar

The European Central Bank is expected to raise interest rates again this week in response to renewed fighting in the Middle East, which has pushed up energy costs and risks further stoking inflation. The ECB's governing council will meet on Thursday to discuss a rate hike, with many analysts predicting that the benchmark rate will be increased from 2.25% to 2.5%. This would mark the second interest rate hike this year for the eurozone.

Renewed clashes between the US and Iran have sent oil prices soaring, making energy flows through the Strait of Hormuz uncertain. As a result, inflation in the 21-nation eurozone has hit a three-year high of 3.3% in August, well above the ECB's target rate of 2%. The central bank is concerned that prices will spiral even higher if interest rates are not increased.

Despite the expected rate hike, some economists have expressed concerns that tightening monetary policy may not be effective in tackling inflation caused by a supply shock. Felix Schmidt, senior economist at Berenberg bank, argued that 'you can't tackle a supply shock with tighter monetary policy', suggesting that higher borrowing costs would do little to blunt the impacts of the current oil supply shock.