ECB's Nagel: Two More Rate Hikes Are the Baseline

The European Central Bank must be prepared to raise interest rates twice more this year, Bundesbank President Joachim Nagel said on Tuesday, as the eurozone’s inflation outlook deteriorates against the backdrop of the Iran war and persistent price pressures.

Nagel, a member of the ECB’s rate-setting Governing Council, told reporters that the updated baseline scenario now incorporates two additional rate increases, reinforcing a hawkish stance that had earlier pointed to one or possibly two moves. The remarks come ahead of the ECB’s June policy meeting, which he signalled could be the moment to act, according to FXStreet.

“From today’s perspective, the situation is evolving less favourably than in the earlier baseline scenario,” Nagel said. “This makes it all the more appropriate for the Governing Council to respond in June if the outlook does not improve markedly.”

Those comments, first reported by Bloomberg, reflect a Governing Council increasingly alarmed by an inflation trajectory that has reversed the progress made through late 2025. Eurozone harmonised inflation rose to 2.9 per cent in April, up from 2.4 per cent at the end of 2025, defying forecasts that had pencilled in a steady decline toward the ECB’s 2 per cent target.

Two quarter-point hikes from the current deposit rate of 2 per cent would lift borrowing costs to 2.5 per cent, a level the ECB had not expected to reach again this soon after its cutting cycle of 2024–2025. A separate Bloomberg survey of economists published Monday showed a growing consensus that two rate increases are now priced in for the remainder of 2026.

The Iran conflict, Nagel said, is the primary driver of the worsening outlook. The war has disrupted energy supply chains, pushed oil prices above $100 a barrel, and fed through to higher input costs across the eurozone’s manufacturing and services sectors. But he also pointed to more structural forces: wage growth running above 4 per cent in Germany, and inflation expectations that risk becoming untethered from the ECB’s target.

“Our mandate requires us to act if inflation expectations de-anchor, and the data will decide the central bank’s decision in June,” Nagel said.

June 5, the date of the next Governing Council meeting, is now viewed as a live decision point. Markets currently assign a roughly 70 per cent probability to a quarter-point hike, based on overnight index swap pricing, with a second move fully priced by September. And the euro edged higher against the dollar following Nagel’s remarks, trading at $1.087, up 0.3 per cent on the session.

Not every Governing Council member shares Nagel’s urgency. ECB President Christine Lagarde has struck a more measured tone in recent public appearances, emphasising the importance of incoming data rather than pre-committing to a rate path. The split mirrors the debate that played out inside the Federal Reserve through the first half of 2026, where hawks ultimately prevailed after April’s jobs data came in hotter than expected.

The broader central-bank landscape is moving in the same direction. The Bank of England’s Monetary Policy Committee delivered a surprise 25-basis-point increase at its May meeting, citing second-round effects from energy costs. Australia’s Reserve Bank, which had been on hold since November 2025, resumed hiking in April. Only the Bank of Japan has bucked the trend, maintaining its accommodative stance as domestic inflation remains closer to 1 per cent.

The inflation puzzle

Beneath the April HICP headline of 2.9 per cent sat considerable divergence across the currency bloc. Services inflation remained sticky at 3.8 per cent, while energy costs, the historical driver of eurozone disinflation, turned positive for the first time in 18 months. Core inflation, which strips out food and energy, held at 2.7 per cent — essentially flat since January.

Goldman Sachs economists revised their ECB call last week, pulling forward their first hike projection from September to June and adding a second move in December. “The Iran supply shock is not a one-off pulse,” the Goldman note read. “It is propagating through wages, services, and expectations in ways that make the inflation outlook materially worse than the March staff projections.”

The Bundesbank has been among the most consistently hawkish voices on the Governing Council. As its president, Nagel carries institutional weight that extends beyond his single vote — his public interventions often preview the direction of the German bloc within the Council. As the eurozone’s largest economy, Germany is particularly exposed to the energy-price channel of the Iran conflict.

For eurozone borrowers, two additional quarter-point hikes would mean a cumulative 75 basis points of tightening since the ECB’s pivot. Variable-rate mortgage holders in southern Europe — where floating-rate loans dominate — would absorb the increases directly, while corporate borrowing costs across the currency area would rise in parallel. The ECB will be weighing those transmission channels against the risk of allowing inflation expectations to drift above target for a third consecutive year.

What’s next

Updated staff macroeconomic projections land at the June meeting, providing the first official restatement of the inflation and growth outlook since March. Combined with the May inflation flash estimate due on 2 June, those forecasts will frame the decision.

If the staff projections show inflation above 2 per cent through 2027, the case for a June hike becomes difficult to resist. Yet a deterioration in growth — the eurozone economy expanded just 0.1 per cent in the first quarter — could stay the hand of Governing Council doves who worry that raising rates into a slowdown risks tipping the bloc into recession.

Nagel acknowledged the growth risk but framed it as secondary. “Price stability is our primary mandate,” he said. “The cost of acting too late is larger than the cost of acting too early.”

The risk for the ECB is that it ends up where the Fed found itself in early 2026: forced to tighten into a geopolitical shock it cannot control, while the economic data offers no clean exit. Two hikes may be the baseline. The question Nagel left open is whether two will be enough.