ECB Prepares for September Rate Hike, Signals End to Further Tightening

European Central Bank (ECB) policymakers are preparing to raise interest rates for the second time this year in September, but they have little appetite to signal further tightening after that.

The ECB raised borrowing costs in June to prevent a war-fuelled rise in energy prices from spreading too widely in the economy. With inflation at nearly 3%, the ongoing Iran conflict, and signs of resilience in the euro zone economy, ECB governors think the time has come to raise the policy rate again.

The potential hike would take interest rates to 2.50% from 2.25%. Policymakers pointed to rising natural gas prices and high petrol prices at the pump as key drivers of inflation. They also argued that the euro zone's economy was faring better than expected, suggesting that the ECB's effort to rein in price hikes was not putting undue strain on activity.

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