By Dhara Ranasinghe and Stefano Rebaudo
LONDON, Sept 7 (Reuters) –
The European Central Bank is widely expected to hike interest rates on Thursday, erring on the side of caution as the U.S.-Iran war drags on, keeping oil prices high and raising inflation again.
Brent crude has risen over the last month, while European gas prices have hit their highest since early 2023.
Here are five key questions for markets:
1/ Is a September rate hike a done deal?
Yes, basically.
Sources told Reuters the ECB is ready to raise rates again in September, echoing the minutes of the July meeting.
Traders have fully priced in a quarter-point move to 2.5% as the latest data shows euro zone inflation rose back above 3% in August on higher energy costs.
“We expect the ECB to hike rates by 25 basis points. Another insurance rate hike,” said ING’s global head of macro Carsten Brzeski. “Or for those who don’t like this term: a dovish rate hike.”
2/ Will it hike again after September?
Policymakers have little appetite to signal further rate increases.
Still, traders anticipate a high chance of another move by December and one more next year, again reflecting energy costs.
Most economists reckon the room for further rises is limited because this could hurt economic growth and those polled by Reuters think the ECB will be done after September.
For now there are no signs that energy-driven inflation is broadening, economists say. Services inflation, for example, dropped despite August’s overall jump in price growth.
More crucially, the labour market is soft and wage growth is still slowing.
“The hot topics for investors will be comments about indirect (inflation) effects and second round effects, how intensely and with what time delay energy prices will eventually translate into core inflation,” said Commerzbank economist Marco Wagner.
“There is a lot of uncertainty around that.”
3/ What will new ECB projections show?
Economists expect the inflation and growth forecasts to remain broadly unchanged, although some anticipate GDP estimates could be nudged higher.
While high gas and oil prices keep upward pressure on inflation, recent data suggests the economy has held up better than anticipated.
Euro zone business activity continues to post solid growth, S&P Global data for August showed, matching its pace from July which was the fastest this year.
“They (the ECB) will probably revise up their 2026 growth forecast slightly,” said SEB macro economist Pia Fromlet.
4/ What does the U.S. selling euros to buy yen mean for the ECB?
Well, not much directly for ECB policy.
But along with a recent U.S. Treasury bond-buying intervention, it worries European central bankers as a sign of more interventionist U.S. policy that breaks with norms, sources told Reuters.
European officials also said they were annoyed the U.S. did not give them a customary heads-up that sales of euros, not dollars, were part of the yen-bolstering intervention.
“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.”
5/ What does the bond selloff mean for the ECB?
Rising global borrowing costs, which have gathered momentum recently on resurgent energy prices and persistent concern about high government debt, have tightened financial conditions, doing some of the ECB’s work.
Ten-year borrowing costs in France, which faces a particularly perilous annual budget battle, and Italy, are up around 65 bps each this year. Germany’s have climbed 50 bps.
All big central banks are likely to face questions about the impact of rising global bond yields, said Michael Metcalfe, head of macro strategy at State Street.
“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,” he said.
“That doesn’t seem to be the case.”
(Reporting by Dhara Ranasinghe in London and Stefano Rebaudo in Milan; Editing by Yoruk Bahceli and Hugh Lawson)
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