European stocks slip as ECB rate hike looms Thursday

The European Central Bank is widely expected to raise its deposit rate by 25 basis points to 2.5% when its Governing Council meets on Thursday, Sept. 10, as renewed hostilities between the United States and Iran drive up energy costs and push eurozone inflation further above its target.

All 65 economists surveyed in a Reuters poll predicted the quarter-point increase, up from 83% in the previous survey, making it the most telegraphed ECB decision in months. The move would mark the second rate hike this year after the ECB raised rates in June for the first time since 2023.global.morningstar+1

Energy-Driven Inflation Surge

Eurozone inflation climbed to 3.3% in August, up from 2.9% in July, according to a flash estimate from Eurostat Euronext N.V.. The figure, a three-year high, was driven almost entirely by energy costs, which rose 14.3% year-on-year as tit-for-tat strikes between the United States and Iran involving vessels in the Strait of Hormuz stoked fears of prolonged supply disruptions.economictimes+1

Core inflation, which strips out energy, food, alcohol, and tobacco, actually edged down from 2.5% to 2.4%, while services inflation — a measure closely watched by the ECB — fell from 3.3% to 3.0%. That distinction is at the heart of a growing debate over whether Thursday's hike is the right call.euronews+1

Critics Question the Move

"We consider another hike a mistake because there is almost no evidence of knock-on effects," Felix Schmidt, senior economist at Berenberg bank, told AFP. "You can't tackle a supply shock with tighter monetary policy."hurriyetdailynews

European markets reflected the uneasy mood on Monday. The pan-European STOXX 600 dipped 0.1%, while energy stocks gained 1.2% as Brent crude futures rose by more than $1 a barrel. Switzerland's benchmark index fell 1.2%, weighed down by Novartis ↘ 1.90%, which dropped 3.3% after an experimental drug failed a late-stage trial. Trading volumes were expected to remain thin with U.S. markets closed for Labor Day.economictimes

What Comes Next

Despite the near-unanimous expectation for a hike, the Reuters poll found that 83% of economists predict the deposit rate will end the year at 2.5%, suggesting Thursday's increase could be the last in what Reuters described as the ECB's shortest hiking campaign in 15 years. Andrew Kenningham, chief Europe economist at Capital Economics, called the hike "certain" but noted the ECB would be guided by fresh growth and inflation forecasts released alongside the decision.reuters+1

Investors will also watch U.S. consumer price data due later in the week, with a stronger-than-expected jobs report raising expectations that the Federal Reserve could follow with its own rate increase.economictimes