ICYMI – ECB’s Nagel says bank must stay vigilant but too early to call rate hikes
Nagel’s insistence on keeping every option open, rather than signalling either an imminent hike or a pause, is likely to keep euro rate markets guarded ahead of the next meeting, with pricing probably continuing to hinge on incoming wage and services inflation data rather than forward guidance. His explicit reference to oil price volatility and Middle East tensions as watch items ties the ECB’s reaction function directly to the same geopolitical risks moving broader commodity and currency markets. The parallel flagging of German recession risk adds a growth-side counterweight that could temper how aggressively traders price further tightening, even with core inflation still running above target.
Bundesbank chief Joachim Nagel said the ECB must keep all options open and stay vigilant on inflation, calling June’s rate hike unavoidable but adding it is too early to signal further increases ahead of the next meeting.
Summary:
- Bundesbank President Joachim Nagel said the ECB must remain vigilant on inflation and keep all policy options open, though it is too early to call for further rate hikes
- Nagel described June’s rate increase as unavoidable, saying even the milder of the bank’s forecast scenarios showed inflation running too high
- He flagged ongoing volatility from Middle East tensions and an unexpected decline in oil prices as factors the ECB will monitor
- The ECB will decide on rates only after reviewing full data at its next meeting, taking what Nagel called a pragmatic approach
- Fellow policymaker Gabriel Makhlouf of the Central Bank of Ireland echoed the stance, citing an absolute will to hit the 2% inflation target
- Nagel welcomed Germany’s recent pension reform as an important step that could support growth and fiscal consolidation
European Central Bank Governing Council member and Bundesbank President Joachim Nagel said on Friday that policymakers must remain vigilant on inflation and keep all options open, even as he stopped short of calling for further interest rate hikes.
Nagel described the work done by the Governing Council as a success story for Europe, noting the bank’s 2% inflation target is now close at hand. Even so, he defended June’s rate increase as necessary, saying the numbers and forecasts available at the time were convincing that inflation remained too high even under the more optimistic of the bank’s scenarios. He characterised the decision as one without a real alternative given the data on hand.
Looking ahead, Nagel said the ECB would take a careful, pragmatic approach at its next meeting, waiting until officials have the full set of available data before reaching a decision. He pointed to ongoing volatility from Middle East tensions and an unexpected decline in oil prices as key factors the bank will be watching, underscoring how closely the ECB’s calculus is now tied to geopolitical and energy market developments. He described the broader situation as still very volatile.
The remarks come against a backdrop of tension between persistent price pressures and a weakening eurozone growth outlook. The ECB has raised rates at every meeting since July 2022, a run that has driven up borrowing costs even as headline inflation, which topped 10% in late 2022, has since eased. Core inflation remains stubbornly above target, with a tight labour market continuing to fuel wage pressures that policymakers watch closely for signs of persistence. At the same time, manufacturing contraction and weak industrial output in Germany, the eurozone’s largest economy, have raised the risk of recession, complicating the ECB’s task of containing inflation without further damaging growth.
Fellow Governing Council member Gabriel Makhlouf of the Central Bank of Ireland echoed Nagel’s stance, saying the bank retains an absolute will to deliver inflation at its 2% target. Nagel also pointed to Germany’s recent pension reform as a significant step forward that could help lift growth and support fiscal consolidation, offering a rare note of domestic policy optimism amid an otherwise cautious outlook.
This article was written by Eamonn Sheridan at investinglive.com.