ECB Sets Stage for 25bps Rate Hike Amid Ongoing Global Tensions

The European Central Bank (ECB) is set to raise interest rates by 25 basis points at its upcoming meeting on September 10, according to economists at Continuum Economics. This decision comes despite recent data and ongoing hostilities between Iran and the US, which some may have expected to sway the ECB's stance.

The August Consumer Price Index (CPI) data showed a headline rate of 3.3%, largely driven by elevated energy prices in August, while core inflation eased to 2.4% from 2.5% in August on a year-over-year basis. Energy prices remain a concern for the ECB, particularly with Iran's hardliners pushing for a harder bargain and delaying a new ceasefire.

However, economists at Continuum Economics argue that recent data suggests disinflation forces are stronger than the ECB admits. They point to 2nd round inflation effects from high energy prices not being evident and labor market conditions remaining lax. With global non-energy prices subdued and fiscal policy mixed in EZ countries, they predict a less hawkish forward guidance and no further hikes in 2026.

Looking ahead to 2027, Continuum Economics foresees a shift in the ECB's attitude with two 25bps cuts down to 2.00% should a 2nd Iran/U.S. ceasefire occur and economic/inflation come in below ECB forecasts.