ECB's rate decision on Thursday: A hike just in case
Summary
- The European Central Bank (ECB) is expected to raise its key interest rate by 25 basis points to 2.5% at its upcoming meeting, driven by rising energy prices and accelerating inflation in the euro area.
- Market expectations suggest another rate hike in December and one next year, though these are uncertain due to a softening labor market and slowing wage pressures.
- Despite rising headline inflation, core inflation trends show a slight decrease over the past year and a half, with services inflation falling in August.
- Rising bond yields in countries like France, Italy, and Germany have already tightened financing conditions, potentially reducing the need for further rate hikes.
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Automatic translation: Originally published in Finnish 09/09/2026, 05:10 GMT. Give feedback here.
The European Central Bank (ECB) is expected to raise its key interest rate at its meeting on Thursday, as the conflict between the US and Iran keeps energy prices high and accelerates inflation once again. Brent crude has risen in price over the past month, and the price of gas in Europe has climbed to its highest level since early 2023. An interest rate hike on Thursday is almost certain, and the market trades at a fully priced-in 25 basis point increase to 2.5%. This is driven, among other things, by the acceleration of euro area inflation in August to over 3% due to rising energy prices. Therefore, based on its mandate, the central bank must also react to the situation “just in case”.
Source: LSEG
Market expectations trade at one more rate hike for December and another for next year, but their materialization is anything but certain. The labor market in the euro area has softened slightly and wage pressure has slowed, and the rise in energy prices has not yet been seen spreading broadly to core inflation. Services inflation actually fell in August despite the rise in headline inflation. In addition, looking at long-term trends, it is noticeable that the average of core prices has decreased slightly over the past year and a half.
EA: Inflation excl. food and energy, semi-annual averages
Source: LSEGIt should also be borne in mind that the rise in bond yields has already tightened financing conditions and done some of the ECB’s work for it. The 10-year yields in France and Italy have risen by of around 65 basis points and in Germany by of around 50 basis points this year. This also acts as a brake on the willingness to hike interest rates.
The ECB will also publish its updated economic forecasts in connection with its rate meeting, and upward revisions to GDP estimates may be seen. Business activity in the euro area has continued its strong growth, and S&P Global's August purchasing managers' data reflected still-improving growth. Economic surprises have also been strongly positive in the euro area.
EA: Purchasing managers' index and economic surprises
Source: LSEG
