ECB Rate Hike All But Certain as Nagel Confirms Market Expectations

The European Central Bank's (ECB) September rate decision is now just one week away, and ECB Governing Council member Joachim Nagel has all but confirmed a rate hike. In an interview, he stated that market pricing for a rate hike next week has already exceeded 95%, adding that he believes investors 'have a fairly clear understanding of how the central bank is likely to respond at this stage.'

Nagel pointed out that Eurozone inflation jumped to 3.3% in August, well above the 2% medium-term target. According to the June economic projections, only through a higher interest rate environment can inflation stabilize on a trajectory back toward the target.

However, when discussing the policy path beyond September, Nagel adopted a more cautious tone, stating that 'As for what happens after the September meeting, I am cautious about giving any specific guidance.' He explained that oil and gas prices continue to fluctuate, financial markets are experiencing sharp turbulence, and uncertainty is high.

The ECB faces a delicate policy balancing act: headline inflation is rebounding due to energy base effects and geopolitical shocks, but the cooling trend in core inflation has not yet been disrupted. Against this backdrop, a September rate hike is virtually a foregone conclusion, but policymakers clearly have not reached a consensus on whether to continue acting in October or December.

The French bond market is also experiencing turbulence, with the 10-year French-German yield spread surging to its highest level since 2012. More than 60% of French debt is held by overseas investors, raising the risk of outflows from price-sensitive funds and creating a new source of instability for the Eurozone during this tightening cycle.