ECB Set to Hold Rates, Signal September Hike

The European Central Bank (ECB) is widely expected to leave interest rates unchanged on Thursday while signaling that another increase in September remains possible as higher energy prices revive inflation concerns.

The ECB last raised borrowing costs in June. Since then, data on inflation, wage growth, economic activity and inflation expectations have eased pressure for an immediate further tightening of monetary policy. However, oil prices have climbed back above $95 a barrel as conflict in the Middle East has intensified, adding to inflation risks.

Financial markets have priced in nearly three additional rate increases. By contrast, most economists surveyed by Reuters expect the eurozone will require considerably less monetary tightening to bring inflation under control.

Analysts expect ECB President Christine Lagarde to strike a balanced tone, stressing that policymakers remain alert to inflationary pressures while avoiding guidance that could reinforce already elevated market expectations for further rate increases.

Extreme summer heat across Europe could also add to inflationary pressures by damaging crops, pushing up food prices and disrupting river transport because of low water levels.

Barclays analysts said an exceptionally hot summer, combined with the effects of the El Niño climate pattern, could add further upward pressure to food prices.

(Reuters, bak)