ECB Governing Council member Nagel: If energy prices remain elevated, it may be necessary to raise interest rates to a mildly restrictive level.

ECB Governing Council member and Bundesbank President Joachim Nagel said the ECB may have to raise interest rates to a level that suppresses economic growth if energy prices remain elevated. "If we face high energy prices like we do now for a prolonged period, I cannot rule out that we may have to enter a mildly restrictive monetary policy range," Nagel said on Tuesday, while adding that it is still too early to judge. It is worth noting that there are differing views within the ECB on the neutral interest rate level. ECB Chief Economist Philip Lane said earlier this year that the neutral rate could be as high as 2.5% exactly the ECB's current rate level. However, Irish Central Bank Governor Gabriel Makhlouf believes that only rates above 2.75% would enter restrictive territory. Nagel also said: "What I or we are concerned about is that this could produce second-round inflation effects." He was referring to upcoming wage negotiations in some countries including Germany. "We all know that if this persists for an increasingly long time, we will see some second-round effects." He said this is why "we must remain vigilant," "that is what we say in this situation. And I can assure you, we remain vigilant." Given the current pressure in the bond market, when asked whether the ECB's so-called Transmission Protection Instrument (TPI) might be activated, Nagel said the tool can only be triggered if there are problems with the monetary policy transmission mechanism. "This has nothing to do with the fiscal challenges facing one or another country in the euro system," he said. Last week, the yield premium on French 10-year government bonds relative to German bunds broke through 100 basis points for the first time in 14 years. ECB Rate Hike Expectations Heat Up, Inflation Remains the "Thorn in the Side" The ECB raised interest rates by 25 basis points on September 10, lifting the deposit facility rate to 2.50%, in line with market expectations. This was the ECB's second rate hike this year. In its policy statement, the ECB Governing Council emphasized that the ongoing Middle East conflict continues to bring inflationary pressure, and the eurozone inflation rate is expected to remain significantly above the 2% target for a "prolonged period." Lagarde further clarified at the press conference that "prolonged period" means "at least through the first half of 2027," with overall inflation expected to return to near the target level around the end of 2027. Meanwhile, the ECB's latest projections show that the average headline inflation forecast for 2026 is 3.0%, unchanged from the June projection; 2.5% for 2027 and 2.1% for 2028, with both latter years revised upward from previous forecasts. Core inflation excluding energy and food is also expected to remain elevated, with three-year projections of 2.5%, 2.6%, and 2.3% respectively, all above the 2% policy target. Some analysts believe that the upward revision of inflation forecasts combined with a data-dependent policy stance provides justification for further ECB tightening. Markets expect the ECB may raise rates up to three more times in this hiking cycle. In addition, the ECB's monthly survey released last Friday showed that eurozone households' inflation expectations rose across all horizons in August adding another layer of support for the tightening bets that are heating up after the second rate hike on September 10. The data showed that the median one-year inflation expectation rose from 2.9% in July to 3.0%, the median three-year inflation expectation rose from 2.7% to 2.9%, and the median five-year inflation expectation rose from 2.4% to 2.5%. The three-year median inflation expectation indicator has higher reference value for monetary policy making. All three horizons are above the ECB's 2% target, which means that even looking only at household sector judgments, "inflation returning to target" is not truly believed within the visible time frame. In the ECB's policy reaction function, inflation expectations are not decorative. In its statement after the September decision, the central bank explicitly stated that policymakers are carefully studying expectations because expectations shape future wage negotiations and corporate pricing behavior; the three-year indicator is particularly valued precisely because it is closer to the cycle length of wage contract pricing. Lane warned this week that a new round of high energy prices means eurozone inflation will remain elevated longer than the ECB initially expected. "We are witnessing a second wave of price increases, not only in oil but also in natural gas. We believe this energy price surge will make inflation higher and more persistent, before falling back toward our target from mid-2027," he said. ECB Governing Council member and Slovak Central Bank Governor Peter Kazimir said the ECB will not hesitate to raise interest rates further if necessary, but determining the next step will take time. He said ECB officials first need to assess whether the indirect effects of war-induced energy cost surges are unfolding as expected, and "whether demand and labor market conditions are strong enough to generate second-round effects." ECB President Lagarde's remarks appeared more cautious. Lagarde said last Friday that energy price spikes do not automatically monetary tightening. She noted: "Interest rates will not move in lockstep with energy prices. Because obviously, energy prices and their impact on prices also affect other factors, especially CKH HOLDINGS consumption. We will take all these elements into account; a synchronized linkage mechanism is not the mechanism that actually applies."