By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Friday signaled that another ECB interest rate increase was highly probable if conditions persisted, citing mounting energy pressures and increasing risks of second-round effects.

“If the situation stays as it is, it seems highly probable that we’ll have to act again,” Nagel said in a speech prepared for the Siemens Bankers Conference in Munich.

The inflation outlook had worsened since September, with energy prices exceeding the baseline and developments approaching the projections’ adverse scenario, he said.

“However, the dynamics of gas and electricity prices have also gained momentum in recent weeks," he said. "And the early stages of the pricing chain point to upward pressures.”

Underlying inflation and wage growth had been broadly stable and longer-term expectations remained near target, Nagel acknowledged. Nevertheless, he warned that underlying price pressures remained elevated.

“Moreover, underlying inflation is still elevated, and short-term inflation expectations have risen in line with the jump in headline inflation," he said. "And every month of elevated inflation raises the risk of second-round effects.”

Higher rates could not increase energy supplies, but monetary policy must prevent the shock from becoming entrenched through wage bargaining, price setting and expectations, he argued.

A repeat of the 2022 inflation episode was unlikely provided policymakers fulfilled their responsibilities, according to Nagel. Compared with that episode, the current shock was more concentrated on oil, without additional food or exchange-rate shocks, while labor markets were less tight, he said.

Decisions would continue to be taken meeting by meeting on the basis of incoming data, Nagel said.