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STRATEGY DESK

The European Central Bank Is Now Expected to Raise Rates in September — the Iran War Is Going Global

The European inflation data published Tuesday has cemented what would have been considered a surprising expectation just a month ago: the European Central Bank is now nearly fully priced by markets for a 25-basis-point rate hike in September, raising the ECB's deposit rate to 2.5% in response to Eurozone inflation that accelerated to 3.3% in August, driven substantially by energy costs that flow directly from the Iran war's disruption of Persian Gulf oil and LNG supply.

Inflation in the euro area rose to 3.3% in August from 2.9% in July, the European Union's statistics office Eurostat said Tuesday, with higher energy costs a major driver, with energy inflation accelerating to 14.3% from 10.3%, according to CNBC's stock market coverage. The release cemented market expectations for the European Central Bank to raise interest rates in September, with a 25 basis point move higher to 2.5% almost fully priced in according to LSEG data.

KEY TAKEAWAYS

Eurozone inflation accelerated to 3.3% in August — up from 2.9% in July — with energy inflation rising to 14.3%, directly reflecting the Iran war's disruption of Persian Gulf oil and LNG supplies, cementing September ECB rate hike expectations to 2.5%.
The ECB's expected September hike represents the global monetary policy transmission of the Iran war: a bilateral U.S.-Israeli military action has produced synchronized central bank tightening across the Atlantic, with European homeowners and corporate borrowers paying the rate consequences.
A European rate hike narrows the ECB-Fed interest rate differential that has kept the dollar strong, affecting U.S. export competitiveness, multinational earnings translation, and demand for dollar-denominated assets from European investors.

The ECB's expected September hike represents the global monetary policy transmission of the Iran war — a conflict that began as a bilateral U.S.-Israeli military action and has produced synchronized central bank tightening across the Atlantic. When the same energy price shock that requires Warsh's Fed to consider a September hike also requires the ECB to actually deliver one in September, the war's global monetary consequences become measurable in interest rates paid by European homeowners, corporate borrowers, and sovereign governments simultaneously.

For the United States, the ECB's hike has a specific secondary effect through the dollar: a European rate hike that reduces the ECB-Fed rate differential narrows the interest rate advantage that has kept the dollar strong relative to the euro, which affects the competitiveness of American exports, the translation of multinational earnings back to dollars, and the demand for dollar-denominated assets from European investors who have been chasing the dollar's yield advantage.

SOURCE:

"Fed Chairman Warsh warns on inflation at Jackson Hole" — CNBC

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