The European Central Bank is expected to raise its deposit facility rate by 25 basis points to 2.5% next Thursday, as the deadlock in the US-Iran conflict continues to drive energy prices higher. The move would mark the ECB’s second rate increase of 2026, following a similar hike in June.
Greek households and businesses face a fresh squeeze as rising Euribor rates increase borrowing costs while the Middle East crisis pushes energy prices higher.
Financial markets have already priced in the expected increase, with one-month and three-month Euribor ratesrising in recent weeks. Three-month Euribor stood at around 2.65% in the middle of the week, up from 2.46% at the beginning of August and 2.31% at the beginning of July. One-month Euribor rose more modestly to 2.30%, from 2.24% in early August and 2.20% in early July.
ECB Executive Board member Isabel Schnabel provided the first signal for another rate increase, as she did in June. She warned that inflation could remain above the ECB’s 2% target for an extended period, citing the impact of the dispute over the Strait of Hormuz on energy prices as well as stronger-than-expected economic performance.
The latest Eurostat figures showed that eurozone inflation rose to 3.3% in August, up from 2.9% in July. Core inflation, which excludes energy and food prices, edged down to 2.4% from 2.5%.
ECB officials are increasingly concerned that higher energy costs could feed through into prices for a wider range of goods and services unless interest rates rise. The central bank is paying particular attention to European natural gas prices, with the TTF benchmark exceeding €70 per megawatt-hour last week. That marked its highest level since late 2022, when the European Union faced a sharp disruption to Russian gas supplies.
TTF prices stood at just €27 per megawatt-hour at the beginning of 2026, meaning they have more than doubled since then. For the EU economy, the impact of higher natural gas prices remains more significant than the rise in oil prices. Oil traded near $95 a barrel last week, compared with around $60 at the beginning of 2026.
Europe also faces risks from relatively low gas storage levels. EU storage facilities were around 65% full, compared with a five-year average of 82%. If the Middle East crisis continues and Europe experiences a harsh winter, gas prices could remain at elevated levels or rise further.
Joachim Nagel, president of Germany’s central bank, also pointed to a likely rate increase next Thursday. He said markets price in a more than 95% probability of a September hike and suggested that investors have a good understanding of how the ECB is likely to respond at this stage.
Nagel avoided signalling another increase beyond September, reiterating the ECB’s position that it will make monetary-policy decisions at each meeting based on the latest economic data. Investors, however, expect another rate increase between December and next spring.
The ECB has become the first major central bank to raise rates in response to the Iran conflict and its impact on energy prices, and the US Federal Reserve may follow.
Fed Chair Kevin Warsh said US inflation remained high, running at an annual rate of 3.4% in July, and warned that if inflation does not decline, the central bank will “have work to do”, signalling that higher interest rates could follow.
The Fed’s benchmark interest rate currently stands above the ECB’s, at 3.50% to 3.75%.
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