Inflation remains stubbornly high! ECB Governing Council member warns: may have to raise interest rates again, but timing remains uncertain.

European Central Bank Governing Council member and Belgian central bank governor Pierre Wunsch said the ECB may need to raise interest rates further. In an interview, he said: "We may have to raise rates again. But I'm no longer betting on it now because there is too much uncertainty on the energy front, and possibly on the AI front as well." Wunsch declined to say whether this means the ECB will act later this month or raise rates at its final rate decision of the year. He said: "Ultimately, whether it's October or December doesn't really matter. Market pricing currently shows we will have to do more. So that is a reasonable-looking baseline scenario, but then again, we are in a highly uncertain world." The ECB is currently discussing whether to raise rates further on top of the two hikes already made this year, in order to curb inflation that is approaching 4%. Economists expect the ECB to make a final rate hike in December, which would push the deposit rate to 2.75%. Market estimates suggest that once that level is reached, interest rates will begin to restrict economic activity. Eurozone inflation rises to highest level in three years Eurostat data showed that the eurozone inflation rate rose to 3.8% in September, up from 3.2% in August; energy prices rose 18.8% year-on-year, becoming an important factor driving inflation higher. Faced with rising energy prices, governments in many European countries have responded with measures such as cutting fuel taxes, intervening in energy prices, and providing subsidies to households and businesses. However, subsidies can only ease the short-term burden and are unlikely to eliminate the root causes of higher energy prices. Wunsch said: "Inflation is too high." He added that "market expectations have changed" and now "no longer expect an October rate hike," and that "we said we would be data-dependent and decide meeting by meeting. We may get some new data, so I would not rule out any possibility." The surge in energy prices triggered by the Middle East conflict is putting pressure on eurozone inflation. However, policymakers stressed that they have not yet seen second-round effects such as wage increases. Some officials, including ECB Chief Economist Philip Lane, said a "measured" policy response should be enough to restore price stability. ECB President Christine Lagarde said in a separate speech that the eurozone's high inflation driven by high energy prices has not yet been transmitted to the broader economy. She said ECB officials are assessing "how much indirect impact is being transmitted through the economy, and seeing how we can best judge ahead of time if second-round effects begin to appear." She said: "We have not yet seen any of this, but we must be extremely careful to ensure we can observe the small signs and indicators of these secondary effects." Although eurozone economic growth has shown surprising resilience, further escalation of Middle East tensions and elevated bond yields remain key risks. Lagarde warned that the drag on economic activity from soaring bond yields will exceed previous expectations. Bank of France Governor Emmanuel Moulin expressed a similar view on Wednesday. He said: "Rising yields are putting pressure on financial conditions." "This may have an impact on demand and may prompt us to adopt a more moderate response to inflation shocks, because rising yields themselves are also playing a role." Moulin also took a position similar to Lagarde's on inflation. He said the ECB expects "indirect effects and second-round effects to remain contained," while eurozone core price indicators will only accelerate "modestly." He said: "What we are also seeingand I think this is an important factoris that inflation expectations for the medium term, whether among businesses or households, are well anchored." He added that the market's understanding of the ECB's reaction function is "already sufficiently well understood." In addition, the sharp rise in the French government's financing costs has refocused market attention on the ECB's crisis response tools, including the so-called Transmission Protection Instrument (TPI) designed by the bank in 2022. The tool is intended to curb unjustified market volatility and allows the ECB to purchase unlimited amounts of government bonds. Wunsch said: "I don't want to speculate on whether and when the ECB might intervene. We have this tool, and you mentioned it, namely the TPI. There are some gray areas here, and I will not speculate on all potential gray areas. But this tool does exist, and if developments become unjustified, we have the corresponding tools." However, current conditions seem unlikely to meet the criteria for activating the tool, because investors are at least partly reacting to France's political deadlock over the budget. Moulin also warned that the ECB is not there to "deal with countries' fiscal problems." Wunsch said: "To some extent, there is some market pressure, or even help, because governments can tell their voters, 'Look, if we don't do this, then we will have to face higher debt interest costs.'" He added: "But we know that from a political perspective, cutting deficits is not easy, and that is the reality."