In June, the ECB increased its key interest rates. Now, Bundesbank chief Joachim Nagel warned, "The ECB cannot let its guard down."
Joachim Nagel, head of Germany's Bundesbank and a member of the ECB's Governing Council, said the June rate increase was unavoidable. "What we did in June was in a way without an alternative," he said.
Nagel explained that even the more optimistic scenario still showed inflation too high. "All the numbers, the forecasts, we had in our June meeting, they were in a way convincing that even in the milder scenario, inflation was too high."
The situation remains fragile. "The whole situation is still very volatile," he said.
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For the coming meeting, Nagel stressed the bank will take a careful approach.
He added that officials will be "very pragmatic" and wait for full data. "When the next meeting is there, we will have then all the necessary data to come to a decision."
The ECB has implemented rate increases at each gathering since July 2022, making loans more expensive. Inflation exceeded 10% in late 2022 but has since fallen, though core inflation remains stubbornly above target. The labor market's tightness continues to fuel wage pressures. In Germany, manufacturing contraction and weak industrial output raise the risk of recession, adding to the ECB's dilemma.
This strategy of deciding at each meeting permits officials to adjust to new information like wage increases and services costs, which analysts monitor for evidence of lasting inflation. Additionally, the outlook for the eurozone economy has weakened, with Germany, the bloc's largest economy, facing recession risks. This complicates the ECB's task of balancing inflation control with supporting growth.
Another ECB policymaker, Gabriel Makhlouf of the Central Bank of Ireland, echoed that stance. He said the bank has an "absolute will" to deliver inflation at its 2% target.
Nagel also pointed to Germany's recent pension reform. He called it a "very important step forward" that could help boost growth and bring fiscal consolidation.
The ECB's delicate position reflects a broader tension across the eurozone. While price pressures - especially from services and wages - remain a concern, economic data from major economies like Germany point to a slowdown. Nagel's insistence on keeping all policy options open signals that the central bank is prepared to act either way, but only after fresh forecasts and data are available at the next meeting.
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