According to a report from Zhitong Finance APP, European Central Bank Governing Council member and Bundesbank President Joachim Nagel stated that the ECB may be forced to raise borrowing costs next month due to a deteriorating inflation outlook.
Speaking in Berlin, Nagel said that even the consumer price baseline projections published by the ECB 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 of knock-on effects on prices for other goods and services.
When ECB officials meet again in December, they may be able to assess this risk more clearly, as they will have a fresh set of economic projections extending through 2029.
"We will make our decision based on these projections. However, based on the current situation, unless the inflation outlook improves significantly, a rate hike appears unavoidable," Nagel said.
Eurozone Inflation Diverges as German Price Growth Slows
A report due to be published by Eurostat on Wednesday is expected to show that the eurozone inflation rate rose to 4% last month, double the ECB's 2% target. However, the core inflation gauge, which strips out volatile items such as energy, is expected to remain unchanged at 2.5%.
The ECB kept interest rates unchanged last week. Since the outbreak of the war in the Middle East, the ECB has raised rates twice. Nevertheless, several officials have indicated that further action may be necessary.
Nagel expressed the same view in an interview last Friday. He said at the time that the ECB would take decisive action when necessary to bring inflation back to its target level.
Nagel said one reason the ECB paused rate hikes last week was that there had been little evidence so far of second-round effects from inflation. But he said rising energy prices "could increasingly feed into wage demands," which "in turn would push prices up further."
Later on Tuesday, Nagel's Dutch colleague Olaf Sleijpen said that although the shock from the Iran situation has proven more persistent than previously expected, so far the impact has only manifested as "initial signs of indirect effects." However, he said that while long-term inflation expectations are "behaving fairly well," short-term inflation expectations are rising.
"With energy prices remaining elevated, the upside risks of further indirect and second-round effects becoming apparent are very clear. This is precisely what central banks do not want to see," Sleijpen said.
Bulgarian National Bank Governor and ECB Governing Council member Dimitar Radev said on Tuesday that last week's rate pause does not mean the hiking cycle is over. His Slovak colleague Peter Kazimir also said last Thursday that last week's rate decision was "not the end point."
Economists expect the ECB to deliver its final rate hike next month. However, investors believe the tightening cycle could extend into 2027.
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