Joachim Nagel, a member of the European Central Bank's Governing Council and President of Germany's Bundesbank, said the ECB may be forced to raise borrowing costs next month because the inflation outlook is deteriorating.
Speaking in Berlin, Nagel said even the consumer price baseline projections the ECB published in September already assumed further rate increases, and since then the inflation situation has worsened further, with repeated surges in energy costs raising the risk that price pressures spill over into other goods and services.
When ECB officials meet again in December, they may be able to judge that risk more clearly, because they will have a fresh set of economic projections extending through 2029.
"We will make our decision based on those projections. But as things stand, unless the inflation outlook improves significantly, a rate hike appears unavoidable," Nagel said.
Eurozone Inflation Picture Mixed as German Price Growth Slows
A report due Wednesday from the EU's statistics agency is expected to show eurozone inflation rose to 4% last month, double the ECB's 2% target. However, the core inflation measure, which strips out volatile items such as energy, is expected to remain unchanged at 2.5%.
The ECB left rates unchanged last week. It has raised rates twice since war broke out in the Middle East. Several officials, however, have said further action may be necessary.
Nagel also expressed that view in an interview last Friday. He said at the time that the ECB will act decisively when necessary to bring inflation back to target.
Nagel said one reason the ECB paused last week was that there has so far been little sign of second-round effects from inflation. But he said rising energy prices "may increasingly feed into wage demands," which "would in turn push prices up further."
Later on Tuesday, Nagel's Dutch colleague, Olaf Sleijpen, said that although the shock from the situation in Iran has proved more persistent than previously thought, its impact so far has amounted only to "initial signs of indirect effects."
Still, he said that while longer-term inflation expectations are "behaving fairly well," shorter-term expectations are rising.
"With energy prices staying high, the upside risks of further indirect effects and second-round effects are very clear. This is exactly what central banks do not want to see," Sleijpen said.
Bulgarian central bank chief and ECB Governing Council member Dimitar Radev said Tuesday that last week's pause does not mean the hiking cycle is over. His Slovak colleague, Peter Kazimir, likewise said last Thursday that last week's rate decision "is not the end."
Economists expect the ECB to deliver a final rate hike next month. Investors, however, believe tightening may continue into 2027.
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