Nagel Backs ECB Rate Hike as Euro Area Inflation Reaches New High

European Central Bank (ECB) Governing Council member Joachim Nagel has signaled support for another interest rate hike in September, as inflation remains above the bank's medium-term target of 2%. In an interview with French daily Le Monde, Nagel said financial markets are correctly pricing in a probability of more than 95% that the ECB will raise its deposit facility rate by 25 basis points to 2.50%, following a quarter-point increase in June.

Nagel emphasized that inflation is not close to the target level, standing at around 3% in August, and that higher interest rates are necessary to prevent elevated inflation from spreading to wages and other parts of the economy. He warned that the risk of second-round effects rises when inflation remains elevated for an extended period, which could lead to larger wage increases during next year's negotiations.

Nagel also noted that rising long-term borrowing costs in global financial markets have complicated the ECB's task, as investors increasingly demand higher returns amid persistent uncertainty. He added that the euro area economy has remained relatively resilient despite geopolitical and economic challenges, with second-quarter growth exceeding expectations and Germany's exports and manufacturing orders showing signs of resilience.

Nagel refrained from offering guidance on possible moves after the September meeting, citing sharp fluctuations in energy prices, volatile financial markets, and heightened uncertainty. The ECB is set to meet on September 10, and markets are expecting a rate hike at this meeting.