Traders see September rate hike as ECB mulls energy price spike

The European Central Bank voted on Thursday to leave its main interest rate unchanged at 2.25%; This was a move broadly in line with market expectations.

But traders are already expecting a rate hike in September as European Central Bank President Christine Lagarde warned that a resurgence of hostilities in the Middle East and the resulting rebound in oil prices poses upside risks to the euro zone inflation outlook.

The ECB has said it is ready to adjust all interest rates to ensure inflation stabilizes towards the medium-term target of 2 percent. Eurozone inflation fell from 3.2% in May to 2.8% last month.

At the press conference held after the announcement, Lagarde said that the bank predicts inflation will remain “well above target” until the first half of 2027.

“A renewed disruption in energy supply could increase energy prices more and for longer than expected,” he told reporters.

“The longer energy prices remain high, the more likely they are to fuel broader inflation through indirect and second-round effects,” Lagarde added.

Ed Hutchings, head of developed market rates at Aviva Investors, said investors now expected a rise of 0.25% in September.

“Inflation expectations remain high and, if sustained further, even tighter policies may be needed,” Hutchings said.

The halt comes after the ECB announced a quarter-point increase in June, its first rate hike since 2023, as inflationary pressures caused by the Iran war energy shock began to weigh on the European economy.

“Despite the ability to keep rates steady today, the market still expects the ECB to be inclined to raise rates for the rest of the year,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

“How aggressively we raise interest rates obviously depends on what’s happening outside the continent, and that makes the policy committee’s job incredibly challenging.”