Market analysts indicate that the European Central Bank's interest rate increase on Thursday is widely anticipated, though uncertainty stemming from the US-Iran conflict casts a shadow over its longer-term policy outlook. Data reveals a 100% probability priced in by markets for at least a 25-basis-point hike in the ECB's key rate.

Since the onset of the US-Iran war, European Central Bank officials have stated that monetary policy will be assessed on a meeting-by-meeting basis. Data released just days before the ECB's September meeting showed the euro area's inflation rate reaching 3.3% in August, with energy inflation surging to 14.3%. The eurozone is a net energy-importing region.

The Middle East conflict threatens commodity shipments through the Strait of Hormuz, driving up oil prices and sustaining high volatility. Consequently, eurozone inflation has persistently exceeded the European Central Bank's 2% target. In recent weeks, government financing costs have risen sharply.

The escalating Middle East tensions, with investors pricing in higher inflation and rate hike expectations, have pushed European bond yields to multi-decade highs. The European Central Bank raised rates in June, marking its first hike since 2023, bringing the key rate to 2.25%, and becoming the first major central bank to initiate rate increases in response to this conflict.

European Central Bank President Christine Lagarde noted at the time that inflation risks were tilted to the upside while economic growth risks were to the downside, yet she emphasized that policymakers would "not pre-commit to a specific rate path." The European Central Bank held rates steady at its subsequent meeting, with its Governing Council stating it was "closely monitoring the intensity, duration, and indirect and second-round effects of the energy shock."