ECB expected to raise rates as Iran war pushes up inflation

The European Central Bank (ECB) is expected to raise interest rates for the second time this year on Thursday in response to higher inflation.

Economists expect the ECB to raise its deposit rate, which is important for savers and banks, to 2.5% from 2.25%. The ECB’s decision will be announced after the Governing Council’s meeting in Berlin. The central bank will also publish new forecasts for inflation and economic growth in the eurozone.

An oil price shock triggered by the war in Iran has pushed inflation higher, with motorists feeling the impact at petrol stations and homeowners facing higher heating oil prices. There is no sign of a resolution to the conflict in the Gulf.

Consumer prices in the eurozone were 3.3% higher in August than a year earlier, the highest inflation rate since September 2023 and well above the ECB’s medium-term target of 2%.

In Germany, high energy prices pushed inflation to 2.9% in August.

Higher interest rates can help curb inflation by making borrowing more expensive and reducing demand. Savers can benefit from higher rates if banks pass them on, while higher borrowing costs weigh on investment.