ECB Set for Modest Rate Hike as Iran Conflict Drives Inflation

European Central Bank (ECB) policymakers are preparing to raise interest rates at their next meeting in September, aiming to contain inflation caused by the ongoing Iran conflict. The rate hike is expected to be modest, with a 0.25% increase taking the policy rate to 2.50% from its current level of 2.25%.

The decision comes as inflation remains near 3%, and energy prices continue to rise due to the conflict's impact on natural gas supplies.

ECB governors believe that a second rate hike is necessary to prevent a repeat of the severe bout of inflation that followed Russia's invasion of Ukraine in 2022. However, policymakers have expressed little appetite for further tightening after September, with long-term inflation expectations remaining anchored at the ECB's 2% target.