The ECB spent two years cutting rates. Now it may raise them again.
The reason isn't growth or jobs - it's oil. The Iran war keeps pushing energy prices up, and one of the bank's loudest hawks just said it's time to act.
Joachim Nagel runs Germany's central bank. He also sits on the ECB's rate-setting team. He's known as one of the louder hawks in the room.
He recently told German paper Handelsblatt that ECB rate hikes are "increasingly likely" unless prices cool fast. He doubled down on Tuesday in a Bloomberg TV interview, saying the bank may "have to do something" in June.
Nagel said the ECB has moved off its base forecast from March. It's now closer to what the bank calls the "adverse" path. In plain English, things look worse than they did two months ago.
Why does that matter? Traders now see three ECB moves by year-end. The first could land at the June meeting, which is also when the bank shares fresh forecasts.
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Higher oil prices feed straight into eurozone prices. That's the part everyone sees coming. What worries Nagel is what comes next.
He told Handelsblatt that supply shocks rarely stop at the gas pump. He said it "can easily take 18 months" for the shock to spread to other goods, like food and travel.
Think of it like ink in a glass of water. Once it spreads, you can't pull it back out.
Where prices stand: Energy costs across Europe sit well above where they did at the start of the year. That pressure shows up in headline prices within weeks, not months.
There's a reason the ECB isn't rushing to hike. The euro area is already weak. No one wants to raise rates into a slowdown.
But Nagel was clear on which side the bank cares about more. "Our mandate is price stability," he said, adding the ECB will do its job "no ifs, ands, or buts."
That's a banker's way of saying growth fears won't stop them.
The bottom line: If prices stay high because of energy, the ECB has signaled it will hike. The growth side comes second.
A rate hike from the ECB is bullish for the euro. It also tends to push up yields on European government bonds, which makes them more pricey for sellers like Italy and Spain.
Stocks are a mixed bag. Higher rates can hurt growth names. But banks tend to do well when rates rise, because they earn more on the loans they make.
The next ECB meeting is in June, which is also when the bank shares fresh forecasts. Both will tell investors if Nagel's view turns into the bank's view, or stays a lone hawkish call.
If oil keeps rising, the question stops being whether the ECB hikes. It becomes how many times.
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