ECB set to raise rates in September amid Iran war concerns

The European Central Bank (ECB) is preparing to raise interest rates at their September meeting to counteract economic challenges stemming from the ongoing Iran conflict, according to a Reuters News report. In June, the ECB increased borrowing costs for the first time in nearly three years to prevent war-induced energy price hikes from spreading across the economy.

With inflation hovering around 3%, the ongoing Iran conflict, and a resilient euro zone economy, ECB governors believe an additional rate hike is necessary, the report stated. The policy rate would be raised from 2.25% to 2.50%. The anticipated increase was already incorporated into the ECB’s economic projections from June. Policymakers view the move as essential to avert a recurrence of the steep inflation spike that followed Russia's 2022 invasion of Ukraine.

The primary drivers of the recent inflation include rising natural gas prices and elevated petrol costs at fuel stations. Natural gas is a vital energy source for the euro zone, which heavily relies on imports. ECB policymakers noted that the euro zone economy has performed better than expected, as per output data and business surveys, indicating that the inflation control measures have not imposed undue stress on economic activity.

The report further revealed that the policymakers are not particularly eager to signal further tightening beyond the September meeting.