ECB Prepares for Second Rate Hike in Nearly Three Years Amid Ongoing Conflict

The European Central Bank (ECB) is preparing to raise interest rates for the second time in nearly three years, this time at their September meeting. According to sources familiar with the discussions, policymakers are increasingly convinced that another rate hike is necessary to combat inflationary pressures fueled by the ongoing Iran conflict.

The ECB raised borrowing costs from 2% to 2.25% in June, a move aimed at preventing a war-driven surge in energy prices from spreading throughout the euro zone economy. Now, with inflation nearing 3%, policymakers believe another increase is warranted, particularly given the continued conflict and resilient economic activity.

The expected rate hike would take the ECB's policy rate to 2.50% by September, reinforcing its efforts to prevent a repeat of the severe inflationary episode that followed Russia's invasion of Ukraine in 2022. Rising natural gas prices and elevated petrol costs have emerged as key sources of inflationary pressure, with natural gas being particularly important for the euro zone due to its reliance on energy imports.

Despite the expected rate hike, policymakers appear reluctant to provide guidance pointing toward additional tightening beyond September. Long-term inflation expectations remain anchored around the ECB's 2% target, reducing the urgency for officials to signal further tightening.