ECB rate hike expected as Iran war raises energy costs

The European Central Bank is expected to raise interest rates again this week as renewed fighting in the Middle East raises energy costs and adds to inflation pressure in the eurozone.

Eurozone inflation reached 3.3 percent in August, above the ECB's 2 percent target. The 21-nation currency area is heavily dependent on energy imports, and oil prices have risen during renewed clashes in the US-Iran war.

Andrew Kenningham, chief Europe economist at Capital Economics, said the ECB governing council “looks certain” to raise its deposit rate from 2.25 percent to 2.5 percent when it meets Thursday.

The ECB raised rates in June for the first time since 2023, then paused at its July meeting as policymakers watched how the conflict would develop. Governing council members Isabel Schnabel and Joachim Nagel have signalled in recent days that policymakers will resume rate increases.

Some economists disagree with another increase. Felix Schmidt, senior economist at Berenberg bank, told AFP that another hike would be “a mistake” because he saw little evidence of broader knock-on effects from the energy price shock.

The ECB will also receive new growth and inflation forecasts for the coming years. Nagel, who also heads Germany's central bank, told Le Monde that oil and gas prices and financial markets remained volatile and that there were “many uncertainties.”