The European Central Bank (ECB) is widely expected to increase its deposit facility rate by 25 basis points to 2.5% at its meeting on Thursday, marking its second rate hike of 2026 after a similar move in June.
The anticipated increase has already been largely priced in by financial markets, as reflected in the recent rise of Euribor rates, which are widely used to calculate repayments on variable-rate loans.
The three-month Euribor stood at 2.65% in mid-week, up from 2.46% at the beginning of August and 2.31% in early July. The one-month Euribor increased more modestly to 2.30%, from 2.24% and 2.20% respectively.
Inflation concerns drive expectations
The clearest indication of a further rate increase came from Isabel Schnabel, a member of the ECB's Executive Board, who warned that inflation could remain above the bank's 2% target for an extended period.
According to Schnabel, continued disruption linked to tensions around the Strait of Hormuz, combined with stronger-than-expected economic performance across the euro area, is likely to keep upward pressure on prices.
Latest Eurostat figures showed eurozone inflation rising to 3.3% year-on-year in August, up from 2.9% in July.
At the same time, core inflation, which excludes energy and food prices, eased slightly to 2.4% from 2.5%.
Energy prices remain a key concern
ECB policymakers are increasingly concerned that higher energy costs could feed through to broader price pressures if monetary policy is not tightened further.
Particular attention is being paid to the price of European natural gas (TTF), which exceeded €70 per megawatt hour last week, its highest level since late 2022 when the European Union abruptly lost access to Russian gas supplies.
At the start of 2026, TTF prices stood at around €27 per megawatt hour, meaning they have more than doubled this year.
For Europe, the economic impact of rising gas prices is considered more significant than the increase in oil prices, which climbed to around $95 per barrel last week from roughly $60 per barrel at the beginning of the year.
With EU gas storage facilities currently about 65% full, compared with an average of 82% over the previous five years, there are concerns that prices could remain elevated or rise further if tensions in the Middle East persist and Europe experiences a harsh winter.
Markets expect Thursday move
Expectations of a rate increase were also reinforced by comments from Bundesbank President Joachim Nagel.
"Markets are pricing in, with a probability of more than 95%, that we will raise interest rates at the September meeting, and I would say markets have a rather good understanding of how we are likely to react at this stage," Nagel said.
He declined to speculate on additional rate increases, reiterating the ECB's position that decisions will continue to be taken meeting by meeting on the basis of incoming data.
Nevertheless, investors are currently expecting at least one further rate increase between December and next spring.
Focus also on the United States
The ECB became the first major central bank to raise rates in response to inflationary pressures linked to the conflict involving Iran, but the US Federal Reserve could follow.
Federal Reserve Chair Kevin Warsh recently said US inflation, which stood at 3.4% in July, remains elevated.
He suggested that if inflation does not ease, policymakers may need to take further action, signalling the possibility of higher US interest rates.
The Fed's benchmark rate currently stands in a range of 3.50% to 3.75%.
Source: CNA
