ECB Set to Raise Its Key Rate to 2.5 Percent After Inflation Jumped to 3.3% in August
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For financial markets, the matter is all but settled: when the ECB Governing Council meets on Thursday, it is expected to raise its key rate by 25 basis points to 2.5 percent. Futures markets are pricing the move with a probability of 99.7 percent, according to MarketWatch. It would be the second increase within a few months, after the central bank moved upwards in June for the first time in almost three years and lifted the rate to 2.25 percent.
Energy Prices Are Driving Inflation
The main reason lies with prices. Inflation in the eurozone jumped to 3.3 percent in August, up from 2.9 percent the month before, putting it well above the central bank’s 2 percent target. Energy is the driver, having become 14.3 percent more expensive year on year. Core inflation excluding energy and food came in lower at 2.4 percent, though it too sits above target.
Behind the energy price surge is the renewed escalation around Iran and the Strait of Hormuz. The conflict has put oil markets under pressure and has pushed European inflation higher step by step since the spring.
The Economy Is Holding Up, With Second-Round Effects in Focus
Unlike earlier energy price shocks, this rate hike arrives while the economy is in decent shape. Recent sentiment and activity data paint a solid picture, and some economists even expect modest upward revisions to the ECB’s growth forecast for this year.
Martin Wolburg, Senior Economist at Generali Investments, sums up the starting position: “At its meeting on Thursday, the ECB is likely to raise its key rate by 25 basis points to 2.5%. The renewed escalation of the Iran conflict has amplified upside inflation risks, particularly through possible second-round effects on wages, while the latest economic data suggest that the expansion is not only intact but actually broadening.”
Second-round effects are the central argument. Once expensive energy feeds through wage settlements into the broader price base, inflation becomes far harder to shake off. So far, wage data still point away from such a spiral, which several economists cite as a reason for a pause after the September step.
The Real Question: What Comes Next?
The outlook matters more than the decision itself. The bond market is currently pricing in three further quarter-point increases by the middle of 2027. Economists at ING wrote in a recent client note that they expect ECB President Christine Lagarde to keep all options open and to push back against that market consensus. In a Reuters survey, most respondents assume the central bank will sit still after Thursday.
Wolburg takes a similar view: “The hawkish rhetoric of the Governing Council and the minutes of the last meeting reinforce the case for a September rate hike. We expect President Lagarde to maintain a hawkish wait-and-see stance and to keep the door open for further tightening. Even so, we regard a move into restrictive territory as a risk-management adjustment rather than the start of a new hiking cycle.”
One factor is already working in the central bank’s favour: bond yields have risen worldwide, tightening financial conditions on their own and taking part of the job off the ECB’s hands. For startups and scale-ups that means higher cost of capital, while savers are seeing more attractive deposit offers return. The updated projections and the press conference on Thursday will show how far into restrictive territory the central bank is willing to go.
