Bundesbank President Joachim Nagel indicated that the European Central Bank's (ECB) subsequent monetary policy decisions would be largely influenced by the evolution of energy prices. This statement followed the ECB's recent increase of its key interest rate by 25 basis points, bringing it to 2.5%.
Nagel suggested that while rates are currently at the upper limit of neutral territory, where monetary policy neither stimulates nor restricts economic growth, they might need to move into "mild restrictive territory." He stressed that it is premature to speculate on the number of additional rate hikes, but noted the recent rise in energy prices, with crude oil nearing $110 per barrel and European gas prices reaching their highest levels since 2022.
The ECB's recent rate hike was a response to inflationary pressures, partly fueled by renewed conflict in the Middle East. The central bank also increased its forecast for eurozone economic growth in 2026 to 0.9% (up from 0.8%) and anticipates average inflation of 3% for the year.
Other ECB officials have also expressed concerns about the impact of oil shocks. Bank of Malta Governor Alexander Demarco, typically considered a policy dove, warned that the prospects of avoiding further rate hikes are diminishing given the prolonged conflict and the likelihood of sustained high oil prices. He emphasized the need to prevent higher energy costs from causing broader inflation and affecting medium-term expectations, although he noted that inflation expectations haven't surged yet.
Markets are currently pricing in three ECB rate hikes this year, while most economists predict a more moderate tightening cycle. The dilemma for the ECB is balancing the need to control inflation with the risk of further weakening an already fragile economy by raising rates in response to a supply shock.
