Germany's central bank president indicated on Friday that the European Central Bank is prepared to raise borrowing costs again. This statement came just one day after the ECB implemented its first interest rate increase since 2023, a move prompted by energy shocks stemming from the Middle East region.
On Thursday, the ECB increased its benchmark deposit facility rate by 25 basis points to 2.25%, making it the first central bank among the G7 nations to enact a monetary policy response to the Gulf conflict. In a subsequent statement, Bundesbank President Joachim Nagel affirmed, "We are keeping all options open and will act again with interest rate hikes if the situation requires it."
Nagel emphasized that the energy shock triggered by the geopolitical conflict is both severe and persistent, making it impossible for central banks to ignore. He stated that Thursday's rate hike was a necessary measure.
The German central bank issued its latest economic forecasts on Friday, warning that high energy prices, influenced by the situation involving Iran, have pushed the German economy back into stagnation. The overall inflation rate in Europe's largest economy has remained close to 3% for two consecutive years.
The Bundesbank indicated that the primary impact of the current shock on economic growth will be concentrated next year. It revised down its growth forecast for Germany in 2027 by 0.5 percentage points to 0.8%, while also lowering this year's growth expectation from 0.6% to 0.5%. These figures have been adjusted to account for the number of working days in the current year.
According to the German central bank's projections, the country's inflation rate is expected to surge to 2.9% this year before easing to 2.7% next year. Both figures are significantly above the ECB's 2% medium-term inflation target for the eurozone. The bank forecasts that inflation will not fall to 1.9% until 2028.
The report released on Friday noted that there is potential for the situation to deteriorate further.
The Bundesbank warned that risks of higher inflation and lower economic growth have increased substantially. If oil prices rise significantly above the baseline scenario's projected average of $96.9 per barrel for the year, the nation's GDP growth would slow markedly, and inflation would accelerate sharply.
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