ECB Set to Raise Key Rate Amid Energy Price Surge

The European Central Bank (ECB) is set to raise its key rate by 25 basis points to 2.5 percent after inflation jumped to 3.3% in August, according to MarketWatch. This would be the second increase within a few months, following the central bank's move upwards in June for the first time in almost three years.

The main reason behind the rate hike is the surge in energy prices, which are driving inflation. Energy has become 14.3% more expensive year on year, and core inflation excluding energy and food came in lower at 2.4%, though it too sits above target.

Recent sentiment and activity data paint a solid picture of the economy's health, with some economists even expecting modest upward revisions to the ECB's growth forecast for this year. Martin Wolburg, Senior Economist at Generali Investments, sums up the starting position: 'At its meeting on Thursday, the ECB is likely to raise its key rate by 25 basis points to 2.5%. The renewed escalation of the Iran conflict has amplified upside inflation risks, particularly through possible second-round effects on wages.'

The real question is what comes next for the ECB's monetary policy. Economists at ING expect ECB President Christine Lagarde to keep all options open and push back against market consensus. Bond yields have risen worldwide, tightening financial conditions on their own and taking part of the job off the ECB's hands.