ECB Prepares for Second Rate Hike Amid Ongoing Iran Conflict

European Central Bank (ECB) policymakers are preparing to raise interest rates at their September meeting in an effort to combat inflation and the ongoing impact of the Iran conflict on energy prices. The move, which would bring the policy rate up to 2.50% from its current level of 2.25%, aims to prevent a repeat of the brutal bout of inflation that followed Russia's invasion of Ukraine in 2022.

The ECB has already raised borrowing costs once this year, in June, and policymakers see no need to signal further tightening after September. Financial markets currently expect one or two more rate hikes, but the ECB governors are focused on containing inflation, which stands at nearly 3%, rather than hinting at future increases.

Rising natural gas prices and high petrol costs have contributed significantly to inflation, according to policymakers, who also point to the euro zone's economy showing signs of resilience. Long-term inflation expectations remain well anchored at the ECB's 2% target, further supporting the decision to raise rates in September.