ECB Set to Hike Rates as Iran War Fuels Inflation Fears

The European Central Bank is expected to raise interest rates for the second time this year on Thursday (Sep 10), in response to surging inflation caused by the Iran war. The conflict has led to a spike in oil and gas prices, which are likely to have a ripple effect on the fuel-importing euro zone economy.

Economists anticipate that the ECB will increase its policy rate to 2.5 percent from 2.25 percent, with some predicting further hikes if inflation does not improve. The bank's president, Christine Lagarde, and her colleagues are likely to take comfort from recent growth data, which shows that the euro zone economy has been holding up better than anticipated.

However, analysts at Barclays caution that inflationary pressure is quietly building beneath the surface, with core goods prices gaining momentum and producer prices rising faster than consumer prices. The bank's decision will also be influenced by the burden of proof being on the data, as some indicators have been benign, but others suggest that inflation remains elevated.