Euro-area inflation reaccelerated to 3.8% in September, compounded by higher energy prices. Against this backdrop, expectations for another ECB rate hike are strengthening.
Euro-area inflation rose to 3.8% year on year in September, up sharply from 3.2% in August. In particular, higher services prices supported underlying inflationary pressure, while headline inflation remained above the ECB's 2% target. Core inflation was 2.5%, and it will be necessary to assess whether the acceleration in inflation will persist.
In September, the ECB raised its policy rate by 0.25 percentage points, setting the deposit facility rate at 2.50%. Statements from senior officials, including the chief cabinet secretary, indicated that the second-round inflationary effects of higher energy prices were not yet strong, and no decision had been made on an additional rate hike. The policy of making decisions based on the data will continue.
While some market participants are pricing in another rate hike by year-end, the probability of a hike at the October meeting has declined, and a hike from December onward is widely expected. It will be necessary to assess not only the path of inflation but also energy prices, wage trends and economic conditions.
Stronger expectations for an ECB rate hike could affect the euro and European equity and bond markets. The foreign-exchange market is expected to move with interest-rate differentials involving the Federal Reserve and the Bank of Japan also in view. The timing of an additional rate hike remains undecided, and market reactions are expected to change depending on the data ahead.