ECB’s Nagel says another rate hike ‘highly probable’ as energy prices push inflation

An explicit signal from the Bundesbank president that further tightening is likely should support the euro and push up short-dated euro zone yields, especially German two-year debt. Because he ties the risk directly to gas and electricity, euro zone rate pricing is now more sensitive to moves in energy markets, so a rise in oil or gas could feed quickly into ECB hike expectations. His comment that the economy has proved resilient also weakens the argument that growth worries will hold the ECB back, which leaves rate-sensitive European equities more exposed.---Not only open mouths at the ECB:Weekend Fed speak: Collins backs steady, gradual rate hikes, cool on a bigger December moveSunday Fed talk: Schmid says inflation would still be near 3% without energy, Fed has work to do---- Nagel has made it clear that the ECB is not finished: with energy prices running ahead of forecasts and expectations creeping higher, Germany’s central bank chief sees another hike as the likely price of avoiding a 2022 rerun.Summary:Joachim Nagel, ECB Governing Council member and Bundesbank president, said it is highly probable the ECB will have to raise rates again if conditions do not change.He warned that every month of elevated inflation raises the risk of second-round effects.Energy prices have moved well above the path in the September projections, pushing the outlook toward the adverse scenario.Gas and electricity prices have gathered momentum, and early-stage pricing points to more upward pressure.Underlying inflation remains elevated, and short-term inflation expectations have risen with headline inflation.Nagel said the economy has been resilient and a repeat of 2022 is unlikely, as long as the ECB does its job. European Central Bank policymaker Joachim Nagel said on Friday that the ECB will very likely have to raise borrowing costs again, warning that energy-driven inflation pressures are building faster than the central bank had expected.If conditions stay as they are, it seems “highly probable” that the ECB will need to act again, the Bundesbank president said in a speech, Bloomberg (gated) reported. He warned that each additional month of elevated inflation increases the risk of second-round effects, where higher prices feed into wages and broader price-setting.Nagel said the inflation outlook has deteriorated since the ECB’s September projections. That baseline had inflation peaking around the turn of the year and staying above target well into 2027. Since then, he said, energy prices have moved well above the assumed path, and the economy is now approaching the adverse scenario set out in those projections.He pointed to several sources of pressure. Gas and electricity prices have gathered momentum in recent weeks, and the early stages of the pricing chain point to further increases. Underlying inflation remains elevated, and short-term inflation expectations have risen alongside the jump in headline inflation.Nagel also noted that the euro zone economy has so far proved resilient. That suggests he sees room to tighten without undermining growth. His remarks frame the policy question around the risk that an energy shock becomes entrenched, rather than around the strength of demand.He offered some reassurance on the longer view, saying the Bundesbank’s analysis suggests a repeat of the 2022 inflation surge is unlikely, provided the ECB does its job. That condition matters. In his view, avoiding a 2022-style episode depends on the central bank responding in time, rather than waiting for energy prices to ease on their own.As one of the more influential voices on the Governing Council, Nagel has added weight to expectations of further tightening. The next things to watch are energy prices, how much of them passes through to core inflation, and whether other policymakers share his view that the adverse scenario is becoming more likely. This article was written by Eamonn Sheridan at investinglive.com.