ECB Ready to Hike Rates Again in July If Necessary, Nagel Says

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(Bloomberg) — The European Central Bank is prepared to raise interest rates for a second straight meeting next month if the shock from the war in the Middle East requires it, according to Governing Council member Joachim Nagel.

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The fallout from the war is proving too strong to ignore, making Thursday’s increase in the deposit rate necessary even if the situation moderates quickly, the Bundesbank president said. High energy costs are having repercussions for other prices and are affecting core inflation, he said.

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“The Governing Council will be gathering for its next monetary-policy meeting in July,” Nagel said in emailed comments Friday. “We are keeping all our options open and are ready to respond once again, should we have to. Our data-dependent and meeting-by-meeting approach to making decisions remains appropriate.”

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The German official spoke less than a day after the ECB raised borrowing costs for the first time since 2023, becoming the first major central bank to react to the inflation caused by the Iran war.

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The consequences of the conflict are becoming clear in Europe, where consumer prices advanced by more than 3% in May and business activity is sinking. ECB President Christine Lagarde warned Thursday that the energy shock is “broadening” through the economy. 

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Markets expect she and her colleagues to deliver two more quarter-point hikes to contain the jump in prices. Another move could come as soon as July if the situation doesn’t improve in the meantime, according to people familiar with the situation.

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Whatever the timing, further tightening will be required to control prices, the International Monetary Fund said just hours after the ECB hiked.

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“The policy rate will need to rise to keep the impact of the shock on inflation contained,” IMF staff said. The fund’s outlook assumes a cumulative increase of 50 basis points this year, addressing the danger of both headline and core inflation topping 2% into 2028.

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The ECB’s own quarterly forecasts this week indicated quicker gains in consumer prices over the next two years, with economic growth taking a hit as demand sags.

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Nagel said the price outlook had “worsened further” and that the shock is proving to be “strong and persistent.” 

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“That is why we cannot simply ‘look through’ it,” he said. “The interest-rate step would be necessary even if the situation eased quickly.”

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In a separate interview, Governing Council member Primoz Dolenc said that Thursday’s hike enables the ECB to “do the thinking of the broader environment in the next meetings.”

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 “It’s just enough for now to follow our main path,” he told Bloomberg Television.

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—With assistance from Oliver Crook.

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