By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Tuesday that “interest rate hikes will become increasingly likely” if the inflation outlook does not improve significantly.

In an interview with German daily Handelsblatt, Nagel, who heads the Deutsche Bundesbank, said that the current situation was “already painful” for consumers, but “more may yet lie in store for us on the inflation front.”

He said he expected inflation to average 2.7% in Germany for 2026, adding that it could rise above 3% again in some months.

Seeing inflation rates above 4% at some point in 2026, as expected in the ECB’s adverse scenario, could not be ruled out, he said.

“We are already no longer in the Eurosystem staff projections’ baseline scenario, but moving in the direction of the adverse scenario,” he said. “And it should be noted that two interest rate hikes had already been factored into the baseline scenario because these had been priced in by markets in March.”

Asked about the decision to hold interest rates on April 30, he said a hike was discussed during the meeting, but the Governing Council finally decided to wait. As for June, he said there would be additional data and new projections, “thus a more robust basis for a decision.”

He said he still hoped the situation in the Middle East would significantly improve, but noted that high energy prices could not be ignored.

“Interest rate hikes will become increasingly likely if the inflation picture does not change fundamentally,” he said. “Short-term inflation expectations, for example, have already moved away from our inflation target.”

Even if the war were over soon, inflation could remain high for significantly longer than expected only weeks ago, he said, pointing to the destruction of refinery capacities, the depletion of inventories, the disruption of supply chains and high uncertainty.

Regarding the possibility of a 50bp hike, Nagel said: “Nice try. The Governing Council will decide how to proceed further in June.”

He said no one wanted to hike rates while growth was “under heavy pressure,” adding however that the ECB’s mandate was price stability and taking the inflation target seriously was better for the longer term.

Asked if two to three interest rate hikes in 2026 was a reasonable expectation, Nagel said that the best the ECB could do for long-term economic growth was to maintain price stability in the medium term. “We are keeping a close eye on the data.”

Nagel rejected the suggestion that the ECB was risking a recession because it felt it had acted too late in 2022. He said there was “no reason” to make that assumption, noting that at the time the euro area was emerging from the pandemic when Russia launched its war against Ukraine.

The ECB first ended net asset purchases under its bond-buying programs before raising interest rates, he said, noting that it was a sequence he still considered appropriate.

 

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