ECB Rate Hike Bets Cemented by Euro Zone Inflation Spike

The European Central Bank is set to raise interest rates again this month as euro zone inflation rose above 3% in August, driven by higher energy costs. The inflation rate accelerated to 3.3% from 2.9% in July, with crude oil and natural gas prices rising and refiners increasing their margins. However, underlying price pressures remained modest, suggesting that the energy price surge is not yet setting off second-round effects.

The ECB's decision to hike interest rates to 2.50% on September 10 is seen as a relatively easy one, with financial investors already pricing in the move. The focus will be on the rate path further down the line, which is more complicated due to diverging views on the depth of euro zone inflation problems.

Policymakers seem to have no appetite for now to signal any further rate hikes, and economists see a high chance that the ECB will stop in September. This is partly because the labour market is relatively soft, and price pressures have not led to wage growth. Economic growth at around 1% is also weak, which may slow further if the conflict continues.

Despite this, financial markets expect two more rate hikes in the next year, as higher energy prices are likely to seep into broader price setting. Natural gas prices are rising, and the economy has proven resilient to wars, tariffs, and higher rates. This may force the ECB to do more to stem price pressures.