The governor of the German central bank, Joachim Nagel, argued that the next interest rate decisions in the euro area will be strongly dependent on energy price developments, which have been the main driver of inflation in the bloc. In statements to CNBC the day after a new ECB rate hike, Nagel said the future of rates will depend heavily on how energy prices evolve over the next month.
The ECB raised interest rates by 25 basis points, setting the reference rate at 2.5%, which represents the second increase this year and the second since the start of the war in Ukraine. Nagel argued that this rate corresponds to the upper limit of the neutral rate range, echoing previous comments by the ECB's chief economist, Philip Lane, who had indicated that 2.5% would still be within the estimated range for the neutral rate, meaning the value that neither stimulates nor restricts the economy.
ECB President Christine Lagarde downplayed the neutral rate topic, classifying it as something highly conceptual. However, the market interpreted the comments as a signal that European bankers are inclined toward further monetary tightening, especially after the upward revision of inflation projections for 2027 and 2028, with the indicator closing at 2.1% in the latter year, above the medium-term target of 2%.
Nagel refused to comment on how many hikes he expects by the end of the cycle, stating that it is too early to speculate. The German governor also took the opportunity to allay concerns about low natural gas storage levels in Europe, guaranteeing that the situation is not worrying and cannot be compared to the 2022 crisis, given that supply options are now broader and more diversified, namely through liquefied natural gas.
