Another rate hike, just for insurance: Five questions for the ECB

The European Central Bank (ECB) is set to raise interest rates on Thursday, amid concerns over the ongoing U.S.-Iran war and the resulting spike in oil prices. Brent crude has risen over the past month, while European gas prices have hit their highest level since early 2023. The ECB is ready to increase rates again in September, following the minutes from the July meeting.

Traders have fully priced in a quarter-point move to 2.5% as August's data shows euro zone inflation rose above 3% due to higher energy costs. ING's global head of macro, Carsten Brzeski, describes this as an insurance rate hike.

Policymakers are hesitant to signal further rate increases, but traders anticipate a high chance of another move by December and another one next year, again linked to energy costs. Most economists believe there is limited room for further rises, as it could hurt economic growth. Services inflation, for example, dropped despite the overall increase in price growth in August. However, the labor market is soft, and wage growth is still slowing.

Investors will focus on comments about indirect (inflation) effects and second-round effects, as well as how energy prices will eventually translate into core inflation. SEB macro economist Pia Fromlet expects the inflation and growth forecasts to remain largely unchanged, though some anticipate GDP estimates could be nudged higher. The ECB might revise up their 2026 growth forecast slightly, according to SEB macro economist Pia Fromlet.

The U.S. selling euros to buy yen has raised concerns among European central bankers, as it is seen as a sign of more interventionist U.S. policy. European officials were annoyed that the U.S. did not give them a heads-up about the euro-bolstering intervention. This comes after recent U.S. Treasury bond-buying intervention, which has tightened financial conditions and increased borrowing costs in France, Italy, and Germany.

The ECB is cautious about discussing long-dated bonds and is likely to act only if the moves deviate significantly from fundamentals.