ECB Raises Rates a Second Time as Iran War Fuels Inflation

The European Central Bank raised interest rates for the second time since the Iran war broke out in February, responding to signs inflation will stay well above 2%, according to Bloomberg. The deposit rate was lifted by a quarter-point to 2.5% on Thursday, as almost all economists in a Bloomberg survey had predicted, and the ECB reiterated it will not pre-commit to further steps, deciding one meeting at a time as data arrive. The Middle East conflict continues to generate inflation pressures, the bank said, with inflation set to remain well above target for an extended period and the outlook highly uncertain — risks tilted to the upside for inflation and the downside for growth. The move puts euro-area policymakers further ahead of their peers in reacting to an energy-price surge that has produced the fastest inflation in almost three years, contrasting with the Federal Reserve and the Bank of England, which have yet to tighten over the Middle East fighting and may hold again next week. Traders ramped up bets after the announcement and now price three further hikes by October 2027. Fresh projections show inflation averaging 3% this year before slowing to 2.5% in 2027 and 2.1% in 2028, while the full-year growth forecast was upgraded to 0.9% after a strong second quarter. With oil hitting $105 a barrel and European natural gas at levels last seen after Russia's invasion of Ukraine, consumer prices in the 21-nation bloc rose 3.3% from a year earlier in August. There were more encouraging signals too, as underlying inflation, a closely watched services-price gauge and wage pressures all eased — which should reassure officials who argued in July that a "mildly restrictive" stance may be needed, requiring the deposit rate to rise beyond the 2.5% seen as broadly neutral. Governing Council members signaled more may be coming: Lithuania's Gediminas Simkus said the ECB is unlikely to be done, while Bulgaria's Dimitar Radev called December's meeting "live." The economy's resilience could ease the path, with output up 0.6% in the second quarter after a sharp revision to Irish data and manufacturing expanding at its fastest in more than four years on digital investment and public spending. Moody's Analytics' Kamil Kovar said the ECB's acknowledgement of unexpected strength, alongside forecasts for faster inflation, suggests the Governing Council is open to raising rates further. President Christine Lagarde, still linked to an early departure, was due to brief reporters in Berlin.