ECB Rate Hike Expected Despite Inflation Uncertainty

The European Central Bank (ECB) is expected to raise interest rates on Thursday, but the reasoning behind this decision is less clear.

Market odds suggest a quarter-point hike in the deposit rate from 2.25% to 2.5%, which would be the second consecutive rate increase by the ECB since June.

The path to this decision has been compressed, with the ECB raising rates for the first time in three years in response to the energy shock caused by the Iran war.

In August, eurozone inflation hit 3.3%, up from 2.9% in July and the highest since September 2023, driven by a surge in energy prices to 14.3%.

However, core inflation, which strips out energy, food, alcohol, and tobacco, actually fell to 2.4% from 2.5%, while services inflation dropped to 3% from 3.3%.

This suggests that expensive energy is not feeding through into other areas, which is a key consideration for the ECB in deciding whether to tighten monetary policy further.