Market participants are currently almost certain about such a decision. In their assessment, the probability that the ECB will raise interest rates in September is 99%.
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“Despite the fact that energy prices are currently the main driver of inflation growth in the euro area, it will be difficult for the ECB to ignore the fact that the overall inflation rate is rising again and significantly exceeds the 2% target. After the pandemic period, central banks have become much more sensitive to inflation risks, so it is likely that the ECB will choose to act in advance, even if raising interest rates alone will not solve the energy price problem,” says Rūta Ežerskienė, Chairperson and CEO of Citadele Bank.
In August, annual inflation in the euro area rose to 3.3% and reached the highest level since September 2023. However, more detailed data show that the greatest price growth pressure is still related to the energy sector.
With the conflict in Iran intensifying again, energy price inflation in the euro area rose to 14% and was the highest since early 2023. This was mainly influenced by rising oil and natural gas prices in Europe.
Meanwhile, other inflation indicators that are very important for ECB decisions remain relatively stable. Service inflation fell to 3% in August, the lowest in four months, while core inflation, excluding energy and food prices, was 2.4% and essentially remained at the same level as before the start of the conflict in Iran.
However, leading indicators show that an inflation surge in the services sector, which the ECB pays close attention to, can be expected soon. Data from the “Indeed” portal show that the wage growth rate in July was 3%, the fastest in a year and a half. The ECB may interpret such a wage surge as a signal that energy inflation is spilling over into the services sector through higher wages, i.e., as the euro area economy strengthens and prices rise, employees of euro area companies increase pressure on employers to raise wages, which employers do. In this case, such wage dynamics may be an additional signal to the ECB that it is time to raise interest rates again.
The euro area economy maintains momentum
According to R. Ežerskienė, another interest rate hike is supported by the state of the euro area economy.
“ECB decisions are influenced not only by inflation but also by the economy’s ability to withstand tighter monetary policy. Although economic growth in the euro area remains moderate, in recent months we have seen more and more signs of recovery both in Germany and other European Union countries. This allows the ECB to focus more on controlling inflation without fearing that one additional interest rate hike will significantly slow economic activity,” she says.
The euro area economy has also so far proven to be more resilient to the energy price shock than during the 2022-2023 energy crisis. One reason may be rising defense spending, which increasingly contributes to economic activity and partly offsets the impact of more expensive energy.
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The December decision is still unclear
According to Citadele Bank’s assessment, the September decision to raise interest rates to 2.5% seems almost inevitable. However, there is less clarity about further ECB actions.
The market currently estimates that the probability of another interest rate hike after the September meeting is only 19%, but the December meeting is assigned a 56% probability that the ECB will raise rates again.
“It is still early to decide on December. However, raising interest rates above 2.5% would seem a much more difficult decision because then the ECB would have to pay more attention not only to inflation but also to the possible negative impact on economic growth,” says R. Ežerskienė.
What would this mean for loan recipients?
According to Citadele Bank data, the average mortgage loan amount in the bank is 144 thousand euros, and the average loan term is 25 years.
At a 2% Euribor interest rate, the monthly payment for such a loan would be about 732 euros. If Euribor increased to 2.5%, the monthly payment would rise to 772 euros.
This means that a 25 basis point ECB interest rate increase would raise the average monthly mortgage payment in Lithuania by about 20 euros. If interest rates are raised in September, the total impact on the average mortgage payment since the start of the conflict in Iran would be about 40 euros per month.
According to Citadele Bank, considering the rapid wage and economic growth, such an increase in loan payments should not become a significant financial challenge for most households.
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