Nagel Favors ECB June Hike Unless Outlook Improves Markedly

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(Bloomberg) — The European Central Bank will need to increase interest rates in June if there isn’t a significant change in the outlook, according to Bundesbank President Joachim Nagel.

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“From today’s perspective, the situation is evolving less favorably than in the earlier baseline scenario,” he said in emailed comments on Friday. “This makes it all the more appropriate for the Governing Council to respond in June if the outlook does not improve markedly.”

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The remarks come a day after the ECB kept borrowing costs unchanged, though President Christine Lagarde signaled that a hike will be considered at the next meeting. People familiar with the situation told Bloomberg that ECB officials are likely to raise rates then unless there are positive developments on energy prices and ending the Iran war.

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Nagel said that the ECB took a “vigilant, wait-and-see approach because we want to gain a clearer view of developments,” adding that “we are aware of the risks to price stability and are ready to act at any time.”

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When policymakers next meet in June, they will be reexamining their scenarios for growth and inflation. The war in the Middle East is now in its third month and there are no indications that an end is imminent.

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Nagel stressed that even the ECB’s base case factors in market expectations for rate increases.

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“Let’s not forget that the baseline scenario already entails a more restrictive monetary policy,” he said.

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Earlier on Friday, his Estonian colleague Madis Muller was similarly outspoken, saying in a blog post that one needs to be “prepared for the possibility that the ECB Governing Council may still be forced to raise interest rates in the near future.” Muller himself won’t be making that decision as his term ends before the June monetary-policy meeting.

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Their Austrian counterpart Martin Kocher was more reserved, arguing that Thursday’s hold provides policymakers with more time to assess whether the Middle East crisis triggers prolonged inflation.

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Economic developments are still close to the ECB’s baseline scenario published in March, but the inflation outlook has deteriorated and prolonged inflation may be possible, he said in a blog post.

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“It is still too early to see a broader rise in prices or second-round effects in the available data,” Kocher said. “However, the longer energy prices remain high, the more likely these become.”

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—With assistance from Marton Eder and Ott Tammik.

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(Updates with Kocher starting in ninth paragraph)

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