ECB Poised for Second Rate Hike Since Iran War, Deposit Rate Seen at 2.5%

The European Central Bank is poised to raise its deposit rate to 2.5% on September 10 as a jump in energy prices tied to the Iran war keeps inflation well above target.

According to Bloomberg, the ECB is expected to lift the deposit rate by 0.25 percentage point at its monetary policy meeting in Berlin on September 10. In a Bloomberg survey, all but one economist forecast a rate increase.

If delivered, it would be the ECB’s second increase since the outbreak of the Iran war, after a move in June. Unlike the Federal Reserve and the Bank of England, the ECB has been reinforcing its tightening stance to counter energy-driven inflation pressure.

Consumer prices in the euro area rose more than 3% last month, the highest level in about three years. Economic growth has also held up better than initially expected, strengthening the case for another rate increase.

The ECB’s economic projections due the same day are also expected to reinforce the case for tighter policy. Markets expect the central bank to raise its inflation forecast for next year from 2.3% and also lift its growth outlook. This year’s inflation forecast is likely to remain at 3%.

The policy path after this increase, however, is less certain. Markets have priced in at least two more rate hikes, while economists are relatively skeptical. ECB officials are also divided over the need for further tightening.

Gediminas Simkus, governor of the Bank of Lithuania, has argued that raising rates to 2.5% alone would not be enough to bring inflation back to the ECB’s 2% target. By contrast, ECB Executive Board member Piero Cipollone has called for caution, saying excessive tightening could damage the economy.

In particular, a 2.5% deposit rate is viewed as the upper end of the neutral-rate range that neither stimulates nor restrains economic activity. With global government bond yields having climbed sharply and uncertainty persisting over the Middle East and U.S. trade policy, the ECB may grow more cautious about additional increases.

ECB President Christine Lagarde is scheduled to hold a press conference after the policy decision. Markets are expected to focus less on the rate move itself than on Lagarde’s comments about the scope for further tightening.