By Francesco Canepa and Balazs Koranyi
FRANKFURT, Sept 10 (Reuters) - The European Central Bank looks set to raise interest rates on Thursday for the second time this year, seeking to head off an energy-driven surge in inflation triggered by the Iran war.
Attacks by both sides since the end of August have shattered a month of relative calm, with the U.S. and Iran hitting military, shipping and energy assets. That has sent oil and gas prices soaring again and revived fears about a wave of price hikes
in the fuel-importing euro zone.
Economists expect the ECB to respond by raising its policy rate to 2.50% from 2.25% on Thursday and signalling it is ready to tighten further if the inflation outlook does not improve.
"A September hike looks all but locked in," Alessia Berardi, head of global macroeconomics at the Amundi Investment Institute, said. "Inflation remains elevated and should stay sticky over the next few months before easing toward the second half of next year."
RESILIENT ECONOMY PROVIDES COMFORT
ECB President Christine Lagarde and colleagues, this month gathering in Berlin for their annual venture away from the central bank's headquarters, are likely to take comfort from recent growth data.
The 21-country euro zone economy has been holding up better than anticipated despite higher fuel costs, competition from China and the impact of droughts.
Bank lending even picked up pace in July, suggesting the ECB's June rate rise had not yet dented activity and giving policymakers scope to tighten further if needed.
"We expect President Lagarde to maintain a hawkish wait-and-see stance, leaving the door open to further tightening," Martin Wolburg, senior economist at Generali Investments, said.
Financial markets are pricing in another two or three hikes by the end of next year.
Financing conditions have already tightened as long-term bond yields scale highs not seen since before the global financial crisis, reflecting inflation concerns and worries about ballooning government debt. Competition from bond sales by big tech companies aggressively raising money to fund the AI boom, and political turmoil in Germany, have added to upward pressure on yields.
ECB TO RAISE GROWTH AND INFLATION PROJECTIONS
On Thursday, the ECB is also expected to raise its growth projections for this year, and possibly 2027, reflecting the economy's staying power.
But it may push back the timeline for inflation — now above 3% — to return to its 2% target. In June, the bank had pencilled that in for next summer.
Thursday's forecasts are unlikely to fully capture the latest energy-price surge, however, with Brent crude having touched $100 a barrel on Wednesday.
Lorenzo Codogno, founder of LC Macro Advisors, said higher fuel costs, trade tensions and weather-related disruptions were creating conditions for another rise in inflation, potentially forcing the ECB to tighten again in October and December.
"We may now be at an inflation turning point, and wages will also show upward pressure at some point," Codogno said.
BURDEN OF PROOF IS ON THE DATA
So far, the key indicators the ECB watches have broadly been benign.
Core inflation, which strips out energy and food prices, eased to 2.4% last month and the latest survey showed consumers had trimmed their expectations for price growth. Pay rises had also moderated.
But analysts at Barclays cautioned that inflationary pressure was quietly building beneath the surface, with core goods prices gaining momentum and producer prices rising far faster than consumer prices.
"This leaves core goods inflation on a firmer footing and provides a higher base from which we expect the inflationary effects of the Middle East conflict to build over the quarters ahead," they wrote in a note.
Carsten Brzeski, global head of macro at ING, said that companies — at least in Germany — had so far absorbed the higher costs, in marked contrast to 2022, when the energy shock following Russia's invasion of Ukraine unleashed a broad inflationary surge.
LAGARDE LIKELY TO FACE QUESTIONS ON HER OWN FUTURE
Beyond the rate decision, Lagarde is likely to be asked at her post-decision press conference about her own tenure, which is scheduled to run until October 31, 2027.
The ECB chief has repeatedly been linked to the leadership of the World Economic Forum, and spoke in July of her desire to champion European values in some capacity during the campaign for next year's French presidential election.
Pressed later that month on whether that meant leaving the ECB early, she merely said: "You are not going to see the back of me before 2027."
A report last week suggesting that ECB board member Isabel Schnabel was in talks to join the International Monetary Fund could herald a reshuffle at the top of the euro zone's central bank.
(Editing by Catherine Evans)
