US-Iran tensions make September ECB hike 'more likely than not

While the ECB held rates steady today, it now looks more likely than not to hike again at its next meeting in September.

On the surface, nothing in the data is screaming for tighter policy. Underlying inflation remains contained just above target, and there are, as yet, no clear signs of second-round effects from the spike in energy prices. Growth also remains weak, and officials will be wary of hiking the Euro Area economy into a slowdown or, heaven forbid, a recession.
However, the latest flare-up in US-Iran tensions and the accompanying jump in energy prices appears highly likely to force the ECB's hand. Policymakers have made clear they are watching developments in the Middle East closely, and with good reason: a sustained rise in oil prices threatens to unwind much of the progress made on inflation.

Should the conflict drag on without a path toward de-escalation, the ECB may find itself with little choice but to act pre-emptively in order to safeguard its inflation-fighting credibility.

The euro has dropped following the announcement, in what appears to be a classic case of "buy the rumour, sell the fact.

Swaps markets were already largely pricing in a hike at the September meeting, so with the bar for a hawkish surprise high, the absence of a strong commitment to a rate increase at the next meeting was always likely to be met with some downside for the common currency.