By Sudeshna Ghoshal and Ragini Mathur
Sept 16 (Reuters) - European shares edged up from the previous session's three-month low on Wednesday as a pause in the oil price rally lifted risk appetite ahead of the Federal Reserve's policy decision, with the U.S. central bank widely expected to deliver its first rate hike since 2023.
The pan-European STOXX 600 rose 0.5% to 637.09 points, with major regional indexes also gaining.
Traders are pricing in a 93% probability of a 25-basis-point increase in U.S.
interest rates, according to the CME's FedWatch tool, the first rise under Fed Chair Kevin Warsh.
"While it is reasonable for the Fed to take a wait-and-see approach before hiking rates, it has been talking tough on inflation. If it does not act, its credibility could take a hit," said Kathleen Brooks, research director at XTB.
"Warsh has backed himself into a corner on rates, in our view," she added.
Inflation risks stemming from the Iran conflict have forced investors to reassess the outlook for interest rates, pushing global bond yields higher and pressuring higher-risk assets.
The European Central Bank raised rates for the second time this year last week, and markets still expect another 25 bp increase by year-end, according to LSEG data.
However, euro zone wage growth slowed again last quarter, while negotiated wage deals point to only a modest pickup next year, offering policymakers comfort that price growth remains under control.
Oil prices fell nearly 1% after an unexpectedly large build in U.S. crude inventories, despite ongoing Middle East supply disruptions. [O/R]
Energy shares were the STOXX 600's biggest decliners, while the travel and leisure sector gained 1.2% as the prospect of lower fuel costs offered some support.
Bond yields also eased from multi-month highs. Short-dated British government bond yields were on track for their largest one-day fall since May 20, declining more sharply than those elsewhere.
Data showed British inflation accelerated to 3.1% in August from 2.9% in July, a day before the Bank of England's policy decision. The central bank is widely expected to leave rates unchanged.
European banking stocks rose 0.5%, recovering some of Tuesday's losses.
Chip-materials maker Soitec was the biggest gainer on the STOXX 600, with a 13.4% rise, after JPMorgan upgraded the company's stock to "overweight" from "neutral".
Barratt Redrow rose 11.7% after reporting a higher-than-expected adjusted pre-tax profit of £572.8 million ($771.50 million) for the year. However, it trimmed its home completions target for its fiscal year to June 2027.
Pan African Resources gained 5.5% after the miner said its full-year revenue more than doubled.
Shares of British defence and engineering group Babcock International gained 2.8% after it retained its annual forecast.
(Reporting by Sudeshna Ghoshal and Ragini Mathur in Bengaluru; Editing by Sherry Jacob-Phillips, Kirsten Donovan)
