European Central Bank: Hawkish rate path supports Euro – UOB

The European Central Bank (ECB) recently increased interest rates by 25 basis points, signaling a more hawkish approach in the face of persisting energy-related inflation risks. UOB economist Lee Sue Ann predicts another 25 basis point hike, likely in December, with October already considered a crucial meeting. The ECB emphasized that the Middle East energy shock continues to drive inflation, with risks leaning towards the upside despite uncertainties about economic growth.

While the bank does not view the September hike as final, October is now viewed as a live meeting due to ongoing energy-driven inflation concerns and fears of second-round effects through wages and underlying prices. The ECB has raised its key policy rates to 2.50%, 2.65%, and 2.90% for the deposit facility, main refinancing operations, and marginal lending facility, respectively.

The decision reflects the Governing Council's belief that the Middle East conflict continues to generate inflation, with inflation staying above target for an extended period. If energy prices escalate further or second-round effects become entrenched, the ECB might intervene sooner than anticipated.