The European Central Bank is raising interest rates: energy inflation and the war in the Middle East. The ECB is ready for its second rate hike of the year due to inflationary pressures, mainly driven by energy prices, while all eyes are on the bank's projections and the statements of its president, Christine Lagarde, which will be presented later. Oil prices have returned to $100 per barrel due to the war in the Middle East, while natural gas prices in Europe have risen to levels higher than those of 2023.

The annual inflation rate in the eurozone has reached its highest level in the last three years at 3.3% in August due to the rapid increase in energy prices. According to Peter Vanden Houte, head of research at ING Group, the bank is expected to raise the deposit rate by 25 basis points to 2.5% due to the resilience of the eurozone economy and high energy prices that have pushed inflation above 3%. Vanden Houte has stated that core and services inflation has not yet signaled broader concerns, as the continuing pressures are predominantly driven by energy, which could prevent the ECB from adopting an overly austerer stance at its upcoming conclave. "We wait for the new projections from the ECB to contain only slight upward revisions in growth and inflation projections," Vanden Houte said. "Although markets expect further rate hikes in the future this year, we are a bit more cautious." Vanden Houte has added that the bank might adopt a "wait-and-see" stance after this rate hike. "Only if the war in the Middle East continues, potentially pushing energy prices even higher, the ECB could consider raising rates again in December," Vanden Houte added.

Bill Diviney, head of macroeconomic research and senior economist at the eurozone of ABN AMRO, has added that updated macroeconomic projections and Lagarde's statements will attract market attention, as the ECB inflation forecast for 2027 is expected to see an upward revision. "Lagarde will likely be pushed to continue moves given that markets expect almost two more rate hikes after the September hike, but while we expect a more austerer rhetoric around inflation, she will likely reiterates the approach of the conclave for conclave," Diviney said. Alain Durree, head of European macroeconomic research at the NBK, has stated that Lagarde might adopt a neutral tone in the near future to keep all options open while avoiding signaling a prolonged rate hike cycle. Durree has noted that the ECB will not raise rates until the end of 2027. "First, a resolution of conflicts in the Middle East by the end of January should ease energy prices.

Second, softer labor market conditions then will limit the risk of two-round effects," Durree said. "Third, the anticipated appreciation of the euro will further soften both headline and core inflation," Durree added, noting that these three main factors could support the probability of the bank continuing to raise rates.