FRANKFURT, March 11 - Joachim Nagel, the head of Germany’s Bundesbank, said the European Central Bank will respond quickly and with determination if higher fuel costs resulting from the Iran war translate into persistently higher inflation across the euro area.
Investors briefly priced in the possibility that central banks might return to rate hikes - with markets implying two ECB increases on Monday - before paring those expectations after U.S. President Donald Trump described the conflict as "very complete". Nagel said Trump’s remarks gave "cause for hope" but added that the jump in energy prices had nevertheless worsened the economic outlook and elevated inflation risks.
"We must be very vigilant," Nagel said in emailed comments. "If it becomes apparent that the current energy price increases will translate into broad consumer price inflation in the medium term, the Governing Council of the ECB will act decisively in a timely manner."
The ECB is widely expected to keep its policy rate unchanged at its meeting next week and to set out scenarios for growth and inflation if the confrontation continues. Money markets currently assign a little over a 50% chance of a year-end hike to the ECB’s 2% policy rate.
Like many of his colleagues, Nagel said he supports "a wait-and-see approach" for now, but the recent market and price developments have likely ended the debate about inflation undershooting the ECB’s 2% objective for the near term. "The discussions about falling short of our inflation target are likely to be over for the time being," he said.
At the same time, Nagel cautioned that uncertainty remains high. "At this point in time, however, it is still too early to reliably assess the medium- to long-term consequences given the volatile situation," he said, underlining the difficulty in forecasting how sustained any energy-related price pressures might be.
The ECB’s previous handling of energy-fuelled inflation after Russia’s invasion of Ukraine in 2022 - when the initial reaction treated the spike as transitory - is part of the backdrop to current sensitivity about energy-driven price moves. Since that period, inflation in the euro zone has fallen and has been hovering around 2% for over a year.
Policy makers will now monitor whether recent rises in energy costs feed through to broader consumer prices in a way that could require timely and decisive monetary tightening.