ECB Set to Raise Rates Amid Rising Eurozone Inflation and Energy Prices

The European Central Bank's (ECB) interest rate decision is due today in Frankfurt, and market expectations are for a 25-basis-point increase to bring the benchmark deposit facility rate up to 2.50%. The policy decision has kept borrowing costs tightly anchored across the continent.

Euro zone sovereign bond yields have held near multi-year high watermarks, with the 10-year German bund hovering at 3.037%, close to its highest levels in two years. Further out the curve, the 30-year bund has remained firm at 3.432%, lingering just below its 15-year high touched earlier in the week.

The elevated energy prices following the expanding military conflict in the Persian Gulf have exacerbated cost-push inflation fears across European economies, with eurozone inflation picking up to 3.3% in August, propelled by a 14.3% jump in energy components.

Institutional allocators expect the ECB's updated staff projections to reflect upward revisions to medium-term HICP inflation, signaling that restrictive policy will need to be maintained well into autumn to prevent second-round wage effects.