Economist: ECB almost certain to raise key interest rate to 2.5%

The European Central Bank is expected to raise interest rates again this week as renewed fighting in the Middle East drives up energy prices and threatens to keep inflation high. In the 21-country euro zone, inflation reached 3.3% in August, its highest level in three years and well above the ECB’s 2% target.

Andrew Kenningham, chief European economist at Capital Economics, said it appeared almost certain that the ECB’s governing council would lift the deposit rate from 2.25% to 2.5%. The move would mark the second increase this year. The bank raised rates in June for the first time since 2023, then held them steady in July while it assessed developments in the conflict.

With Tehran and Washington apparently deadlocked, ECB policymakers Isabel Schnabel and Joachim Nagel have indicated in recent days that another increase is likely. The euro zone economy also grew faster than expected in the second quarter, giving policymakers some room to raise borrowing costs without causing major economic damage, the article said.

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It appears almost certain that the ECB Governing Council will raise the deposit rate from 2.25 to 2.5 percent.

Not all economists support the move. Felix Schmidt, a senior economist at Berenberg, told AFP that another rate increase would be a mistake because there were few signs that the energy shock had spread into other parts of the economy. "A supply shock cannot be overcome by tightening monetary policy," he said. Higher borrowing costs can normally curb inflation by reducing demand, but analysts said they would do little to soften the impact of the current oil supply shock.

Schmidt said the ECB was concerned about reacting too late, recalling criticism over its response to the inflation surge of 2021 and 2022. Most analysts nevertheless expect the bank to pause rate increases after this week’s meeting.

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We believe that another interest rate increase would be a mistake, because there are almost no signs of second-round effects. A supply shock cannot be overcome by tightening monetary policy.