ECB set for September rate hike with no appetite to signal more: sources

European Central Bank officials are poised to increase interest rates during their September meeting to curb inflation stemming from the Iran war, but they are hesitant to suggest additional rate hikes afterward, according to three sources speaking to Reuters. The ECB lifted borrowing costs for the first time in nearly three years in June to prevent energy price inflation from spreading further.

With inflation hovering around 3%, the ongoing Iran conflict and signs of a resilient euro zone economy, ECB governors believe it's time for another rate increase to 2.5% from its current 2.25%, the sources said, on condition of anonymity due to the sensitive nature of the information. The ECB had previously assumed a rate hike in June, which they see as demonstrating their commitment to preventing a repeat of the hyperinflation of 2022 following Russia's invasion of Ukraine.

Rising natural gas prices, a major energy source for the euro zone, and high petrol prices at the pump were cited as key inflation drivers. ECB policymakers also noted that the euro zone's economy is performing better than anticipated, with output data and business surveys supporting their view that tightening measures are not overly burdensome.

However, they remain confident that long-term inflation expectations are anchored at their 2% target, and they see no need to signal further tightening in September, the sources added. Financial markets anticipate one or two additional rate hikes, with the ECB expecting a clearer picture after reviewing August inflation data and the forthcoming staff economic projections at the September 9-10 meeting.