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 prices above $100 a barrel 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% and signal 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, gathering in Berlin for their annual venture away from the central bank's Frankfurt 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 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 one more rate hike this year, followed by another one or two moves next year.
Economists, in contrast, think Thursday's move may be the ECB's last for now, a growing number see a risk that further tightening may be needed.
One reason that subsequent rate hikes may be limited is that 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% — returning to its 2% target. In June, the bank had pencilled that in for next summer.
However, Thursday's forecasts are unlikely to fully capture the latest energy-price surge.
"Even more striking in recent weeks has been the renewed increase in gas prices," Barclays said in a note. "(Gas is) now trading between the adverse and severe scenario assumptions."
"This is especially relevant because, while gas price shocks tend to feed through more slowly than oil price shocks, they also generate larger and more persistent effects on non-energy inflation," it added.
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.
"Unlike the 2022 energy shock, this year’s energy price shock is unlikely to spark a wage-price spiral, as demand conditions are not as conducive to higher inflation," Andrew Kenningham at Capital Economics said.
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 pushed inflation above 10%.
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 and Lincoln Feast.)
