ECB Seen Hiking Rates Despite Eurozone Resilience

European Central Bank (ECB) policymakers are expected to raise interest rates by 25 basis points at their next meeting, marking the second hike this year. This decision comes as the eurozone economy has shown 'an almost unexpected resilience' to the war in the Middle East, partly due to Asian competitors losing orders to European rivals following the closure of the Strait of Hormuz.

Carsten Brzeski, global head of macro research at ING, believes the case for a hike has strengthened since July, when some ECB members had already advocated for one. Headline inflation continues to climb and is expected to stay above 3% year-on-year for the rest of the year, even as core and services inflation 'currently provide no reason to panic.'

The risk of a fresh gas price shock rising has also made it difficult for most ECB policymakers not to see a case for another hike. Markets have started pricing in at least one more hike before year-end, and views within the ECB appear to be diverging, with officials including Isabel Schnabel and Irish central bank governor Gabriel Makhlouf signaling willingness to tighten further.

However, Brzeski notes that after next week's hike, the deposit rate at 2.5% would remain within the range the ECB itself considers neutral. Going further would suggest the ECB views restrictive policy as necessary, but 'there is a big difference between an economy that has shown resilience and an overheating economy that needs restrictive monetary policy.'

Brzeski also warned that excessive or uneven tightening across eurozone countries could create new problems, particularly amid public finance woes and surging bond yields.