By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel said Monday that a rate hike in June would be warranted if the inflation outlook did not improve markedly by then.

Nagel, who heads the Deutsche Bundesbank, said in a speech in Frankfurt that the ECB’s decision last week to keep interest rates unchanged should not be mistaken for hesitation.

“The Governing Council’s vigilant wait-and-see approach should not be confused with reluctance,” he said. “We are aware of the risks to price stability and ready to act at any time.”

The Governing Council had decided that it was worthwhile to wait in order to gain more clarity, Nagel said.

At the ECB’s next monetary policy meeting in June, policymakers would know more about developments in the Middle East and would also have new projections, he said.

“If the inflation outlook does not improve markedly there, this argues for a rate hike,” Nagel said.

The Iran war had changed a previously uneventful inflation picture, with Eurozone inflation having been close to 2% and the outlook pointing to similar developments, he said.

Oil and gas prices had at times risen drastically on global markets and were still fluctuating well above pre-war levels, according to Nagel.

This had a “double negative” effect, cooling growth while heating up inflation, he said.

Higher crude prices were being felt directly in consumer prices via fuel and heating oil, causing Eurozone inflation to jump first to 2.6% in March and, according to the initial estimate, to 3.0% in April, he said.

That was the highest inflation rate since September 2023, Nagel said.

Disruptions in energy markets were also spilling over globally into supply and value chains, making energy-intensive products more expensive and scarce and raising transport costs, he said.

Monetary policy could not prevent an abrupt increase in energy prices, as it could neither keep shipping routes open nor repair production and port facilities, Nagel said.

However, it could influence the medium-term inflation path, he said.

The longer the conflict lasted, the greater the risk that inflation would remain elevated if monetary policy failed to act, he said.

The ECB was therefore watching how strongly high energy commodity prices fed into consumer prices and wage negotiations, and whether domestic price and wage pressure reinforced each other, Nagel said.

It was also monitoring the medium-term inflation expectations of financial-market professionals, companies and households, he said.

From February to March, private households’ medium-term inflation expectations in the Eurozone rose from an average of 2.5% to 3.0%, Nagel said.

The current situation was nevertheless different from 2021 and 2022, he said.

When Russia’s war against Ukraine began, inflation was already high and the deposit rate was negative, while at the start of the Iran war, inflation was around 2% and key interest rates were roughly neutral, he said.

“The starting position is therefore different today than it was then,” Nagel said.

Nagel said he expected the fog to lift somewhat in June and for the Council to see more clearly where things were heading.

“Our goal is clear: we want the inflation rate to settle again at 2% over the medium term,” he said. “That is what we align the monetary policy course with.”

Beyond monetary policy, Nagel said Europe needed to make itself more stable and stronger in response to a world marked by rising rivalry, a rougher geopolitical climate and sudden shifts.

Europe had to make better use of the potential of the single market, with the savings and investments union playing an important role, he said.

The digital euro was also a key project for European sovereignty in payments, Nagel said.

Around two-thirds of all card payments in the Eurozone were currently processed via non-European systems, and Europe should not be “only a passenger” in payments, he said.

The digital euro would complement, not replace, cash, he said.

It would provide a digital payment option usable across the Eurozone in shops, online and between private individuals, and would also be designed to work offline, according to Nagel.

The Eurosystem would have no insight into users’ personal payment data, and an offline function would provide a higher degree of privacy similar to cash, he said.

The digital euro required a binding legal framework, Nagel said.

The EU legislator was now responsible, and he was confident that the legal basis would be completed by year-end, allowing the Governing Council to make a final decision on whether the digital euro would come, he said.

In 2029, everything could then be ready for a possible first issuance, Nagel said.