ECB Set to Deliver ‘Insurance’ Hike as Energy-Driven Inflation Persists; Path Beyond September Unclear

The European Central Bank is poised to raise interest rates on Thursday for what many economists believe will be the final hike of the current cycle, as persistent oil and gas price pressures keep inflation above target.

Traders have fully priced in a quarter-point increase in the deposit rate to 2.5%, according to sources including Reuters. The move comes as euro-zone inflation rose back above 3% in August, driven by higher energy costs. Brent crude has risen over the past month, approaching $100 a barrel, while European gas prices hit their highest since early 2023. The upward pressure on energy markets is linked to renewed fighting in the Middle East, with the US and Iran in conflict over the Strait of Hormuz, a crucial waterway for oil shipments.

“We expect the ECB to hike rates by 25 basis points. Another insurance rate hike,” said Carsten Brzeski, global head of macro at ING, as reported by RTE. “Or for those who don’t like this term: a dovish rate hike.”

**Economists vs markets on further moves**

The overwhelming majority of respondents to a Bloomberg survey expect the deposit rate to stay at 2.5% through 2027, a far more dovish outlook than markets are pricing, according to the Business Times. Traders anticipate about three more hikes by mid-2026, reflecting ongoing energy cost concerns.

Most economists polled by Reuters also think the ECB will be done after September. Policymakers have little appetite to signal further moves. However, some Governing Council members see scope for additional tightening. Lithuania’s Gediminas Simkus said a hike next week “isn’t going to be enough,” while Bulgaria’s Dimitar Radev referred to both September and December as “live” meetings, according to a Bloomberg report. Austria’s Martin Kocher said it will become “much clearer” in coming months if second-round effects from energy prices have materialised.

Executive Board member Isabel Schnabel told Bloomberg it’s “critical” to prevent second-round effects early, before they demand a more forceful response.

For now, economists point to limited evidence that energy-driven inflation is broadening. Services inflation dropped in August despite the overall jump in price growth, RTE noted. The labour market remains soft and wage growth is still slowing.

“The ECB is likely to present a 25 basis-point hike as a necessary step,” said Ken Egan, director of Kroll Bond Rating Agency Europe, in the Bloomberg survey. “But it’ll probably stop short of guiding markets toward another hike, keeping the focus on data dependence, anchored inflation expectations, still-contained wage growth and the need to judge how strongly past tightening is feeding through.”

**New projections and growth outlook**

The ECB will release updated economic projections on Thursday. Economists expect inflation and growth forecasts to remain broadly unchanged, though some anticipate a slight upward revision to 2026 GDP estimates, according to RTE. Recent data show euro-zone business activity continuing to post solid growth, with S&P Global’s August PMI matching the fastest pace this year.

SEB macro economist Pia Fromlet told RTE the ECB will probably revise up its 2026 growth forecast slightly. Even at 2.5%, the deposit rate would be somewhat above neutral, according to more than three-quarters of respondents in the Bloomberg survey.

**Blindsided by US intervention**

European central bankers were annoyed that the US did not give them a customary heads-up that sales of euros, not dollars, were part of a recent yen-bolstering intervention, RTE reported, citing sources. The move, along with a US Treasury bond-buying intervention, has worried officials as a sign of more interventionist US policy that breaks with norms. “The last time there was a global coordinated intervention in the yen was after the (2011) Fukushima earthquake and tsunami – I recall ECB did the euro/yen intervention then,” said Barclays head of euro rates strategy Rohan Khanna. “So I feel the grievance is more to do with being blindsided.”

**Rising bond yields doing some ECB’s work**

Rising global borrowing costs, driven by resurgent energy prices and persistent concern about high government debt, have tightened financial conditions, RTE reported. Ten-year yields in France have risen about 65 basis points this year, Italy’s similarly, and Germany’s by 50 basis points. All big central banks face questions about the impact, said State Street’s head of macro strategy Michael Metcalfe. “The ECB is always careful in how it talks about long-dated bonds and is likely to stress that only if the moves are out of line with the fundamentals are they likely to act. That doesn’t seem to be the case,” he said.

The Strait of Hormuz “has become the swing factor for the ECB’s future decisions, because a prolonged disruption would turn an energy-price shock into a broader inflation problem,” said Dennis Shen, a lecturer at TU Berlin’s International School of Management, in the Bloomberg report.