ECB set for September rate hike with no appetite to signal more, sources say

FRANKFURT, Aug 25 (Reuters) - European Central Bank policymakers are ready to raise interest rates at their next meeting in September to contain the side-effects of the Iran war but they have little appetite to signal further tightening after that, three sources told Reuters.

The ECB raised borrowing costs for the first time in nearly three years in June to prevent a war-fuelled rise in energy prices from spreading too widely in the economy.

With inflation at nearly 3%, the Iran conflict still ongoing and the euro zone economy showing signs of resilience, ECB governors think the time has come to raise the policy rate again, to 2.50% from 2.25%, the sources said, speaking on condition of anonymity because such matters are confidential.

A spokesperson for the ECB declined to comment.

A hike, which was included in the assumptions of the ECB's economic projections in June, was seen as likely to signal the central bank's resolve to avoid a repeat of the brutal bout of inflation that followed Russia's invasion of Ukraine in 2022, the sources added.

Policymakers pointed to rising natural gas prices, a key fuel for the energy-importing euro zone, and high petrol prices at the pump as key drivers of inflation. 

They also argued that the euro zone's economy was faring better than expected, as shown by output data and business surveys, suggesting that the ECB's effort to rein in price hikes was not putting undue strain on activity.

On the other hand, long-term inflation expectations remained well anchored at the ECB's 2% target and policymakers saw no need to hint at even further tightening in September, the sources said. Financial markets expect one or two further hikes. 

The sources said they would have a fuller picture when inflation data for August is published next week, followed by ECB staff's updated economic projections that will be presented at the Sept 9-10 meeting. 

(Reporting by Francesco Canepa and Balazs Koranyi, editing by Deepa Babington)