ECB’s Nagel: December rate hike may be unavoidable

Joachim Nagel, a member of the European Central Bank’s Governing Council, said the bank may raise borrowing costs next month as the inflation outlook worsens.
In a speech in Berlin, Nagel said that even the consumer price baseline forecast released in September was based on expectations of further price increases, and that conditions have deteriorated since then.
He said repeated spikes in energy costs also increase the risk of a ripple effect on prices of other goods. Officials may have a clearer picture of this when they meet in December, as they will produce a new round of economic forecasts through 2029.
“We will make our decisions based on these forecasts. But given the current situation, unless the inflation outlook improves significantly, a rate hike may be unavoidable,” Nagel said.
The ECB kept rates unchanged last week, after raising them twice since the outbreak of the war in Iran. However, several officials have hinted that further action may be needed, and Nagel expressed a similar view to Bloomberg last Friday.
Economists expect a final rate move next month, but investors believe tightening will continue into 2027.
A report to be released by Eurostat on Wednesday is expected to show that inflation in the euro area reached 4% last month, twice the ECB’s target. Core inflation, which excludes volatile items such as energy, is expected to remain stable at 2.5%.
Nagel said one reason for last week’s pause was that the impact of the second round of effects had so far been limited. But he said rising energy prices “may increasingly affect wage demands,” which “in turn would push up prices.”
Although the impact of the Iran situation has proved more persistent than previously expected, so far there have only been “signs of indirect effects.” While long-term inflation expectations look “quite good,” short-term inflation expectations are rising.
With energy prices remaining high, there is clearly an elevated risk of further indirect and secondary effects, which is the last thing a central bank would want to see.