- Inflation will stay significantly above target
- Too early to make a call on rate hikes
- The situation in the Middle East is still very opaque
- Retreat on energy price was a surprise
- Not concerned about debt markets
ECB’s Nagel warned that Eurozone inflation could remain significantly above the ECB’s 2% target, even as recent declines in energy prices offered some near-term relief.
While acknowledging that the recent retreat in oil and gas prices came as a surprise, he made clear that policymakers should not interpret the move as a signal that inflation risks have disappeared, adding that the geopolitical backdrop remains highly uncertain and that the situation in the Middle East is still “very opaque”.
As a reminder, the central bank raised rates by 25 bps in June to 2.25% on the deposit facility responding to an inflation surge triggered by the Middle East conflict and its impact on commodity prices. ECB staff projections now see headline inflation averaging 3.0% in 2026, well above target, before gradually declining toward 2% by 2028.
Nagel’s remarks suggest that although falling oil prices reduce immediate pressure for another hike, the ECB remains focused on inflation risks. This aligns with broader Governing Council messaging from recent weeks. Policymakers are increasingly focused not just on headline inflation, but on whether the energy shock is feeding into wages, services, and broader price-setting behavior.
Importantly, Nagel stopped short of explicitly calling for another immediate rate increase, saying it is too early to make a call on rate hikes. That is more “dovish” compared to his previous remarks and suggests the bar for a rate hike in July remains very high.
