The euro strengthened to its highest level in a week on Thursday ahead of the European Central Bank's policy decision, with officials expected to leave interest rates unchanged while signalling the possibility of a rise in September as rising energy prices threaten to feed through into inflation.
The ECB raised interest rates last month and hinted at further tightening, but a run of favourable data on prices, wages, economic activity and inflation expectations in recent weeks has made a swift rate increase less likely. The bank raised its three key rates by 25 basis points on 11 June, bringing the deposit facility rate to 2.25%, the main refinancing rate to 2.40% and the marginal lending rate to 2.65%.
Higher oil prices, driven by escalating tensions in the Middle East, could nonetheless push the bank to adjust rates in order to prevent an energy shock from triggering a broader spiral in prices. Markets currently price in roughly a 95% probability that the ECB will hold rates steady today, with a significant chance of a hike priced in for the bank's September meeting.
"We have flagged a small risk that the ECB decides to go for an early hike," Samara Hammoud, an international economist at the Commonwealth Bank of Australia, said in a note.
Source: CNA
