The European Central Bank raised its main interest rates by 25 basis points, delivering its second increase of the year as inflation pressures remain elevated. The move comes shortly before the Federal Reserve’s September policy meeting, where markets are increasingly pricing in a possible U.S. rate hike.
The ECB said its Governing Council approved increases across all three of its key policy rates. In its statement, the central bank said the conflict in the Middle East continues to add to price pressures and that inflation is expected to stay above its target for an extended period.
The central bank also described the outlook as highly uncertain. It cited risks that inflation could rise further, while also pointing to downside risks for economic growth.
The decision follows a renewed escalation in the Middle East. The United States and Iran have exchanged strikes in recent days, while Yemen’s Iran-backed Houthis have also taken part in regional attacks. The unrest has renewed concerns over global oil supplies, pushing Brent crude above $100 a barrel for the first time since July.
Investor attention now turns to next week’s Federal Open Market Committee meeting. Several Fed officials, including Fed Presidents Beth Hammack and Neel Kashkari, have indicated they would support a rate increase at the meeting.
Markets have adjusted expectations following the ECB’s decision. After August producer price index data, fed funds futures showed a 76% probability of a Fed rate increase next Wednesday. CME FedWatch data indicated a 70% chance of a hike this month and a 56% probability in October.
