ECB may hike rates amid higher eurozone inflation

The European Union's central bank is likely to raise interest rates when it conducts its next review on Sept 10, experts have warned, but the hike will not be as dramatic as those seen in 2021 and 2022, when there were similar energy-driven inflationary pressures.

The bank, which is known as the European Central Bank, or ECB, is grappling with surging energy costs that have pushed up inflation, but there are some fundamental differences between the situation today and the one in 2021-22, the experts said.

While a rate hike looks to be needed in an attempt to encourage savings, discourage spending, and cool inflationary pressures, they said in a report published on Tuesday that the ECB will likely respond in a "gradual" way compared to 2021-22, when it raised rates "forcefully and persistently".

They said the difference is down to the fact that the 2021-22 energy-driven inflation hike was caused by "a combination of large and unprecedented supply — and demand-side factors".

ECB economists Kristina Barauskaite Griskeviciene and Claus Brand wrote: "This time, the energy supply shock dominates, while demand and public policy stimulus have minor roles. These differences are key to explaining why monetary policy responses differ."

Inflation across the eurozone is currently running at 3.3 percent, which is significantly higher than the ECB's target of 2 percent.

The economists said the spike was partly caused by higher fuel prices attributed to the conflict in the Middle East and its impact on the Strait of Hormuz shipping lane.

"Adverse energy supply factors accounted for around 90 percent of the increase in energy inflation between January and May 2026," they wrote. "During this period, monetary and fiscal policies have exerted only slight downward pressure on energy inflation."

They note in their report that the ECB did not raise its interest rates immediately after the start of the conflict in the Middle East in February, and only announced its first rate hike on June 11, when it raised its deposit rate from 2 percent to 2.25 percent. The increase was the ECB's first in three years.

At the time, the ECB said it did not expect inflation to return to its 2 percent target before 2027.

But with inflation across the eurozone sitting at 3.3 percent in August after having been 2.9 percent in July, the bloc may now be running out of patience and prepared to raise interest rates again, likely from the current 2.25 percent to 2.5 percent, according to market pricing.

The experts said the ECB had resisted earlier pressure to increase interest rates because increases in the cost of energy were not the sole reason for the rise in Europe's inflation rate.

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