ECB Prepares to Deliver Second Rate Hike in Tightest Cycle Since 2011

The European Central Bank (ECB) is expected to raise interest rates for the second time next month, according to a Reuters poll. The decision comes as high energy prices continue to push inflation further away from the bank's 2% target. In June, the ECB delivered its first rate hike in over a year, but paused last month while signaling another increase was coming.

An 83% majority of respondents, 57 out of 69 economists polled between August 10-13, expected the ECB to raise its deposit rate by a quarter point to 2.50% in September. This is a significant shift from previous polls, where 72% and 65% of respondents predicted a rate hike before the July meeting and June respectively.

Economists are cautioning that if the ECB only raises rates once, it would look like a fine-tuning exercise, which is not effective in monetary policy. Many believe another rate hike is highly likely given how obvious it looked to the ECB Governing Council in June. If realized, this tightening cycle would be the ECB's shortest since 2011.

Economists have lowered their inflation forecasts for this year but reversed course again. Median forecasts for the final two quarters of this year were raised by 20 basis points to 3.0% and 3.2%. Inflation is not expected to return to the ECB's 2% target until the third quarter of 2027.