ECB Governing Council Member Nagel: We Can Act Quickly If Necessary to Address Inflation Risks

European Central Bank Governing Council member and Bundesbank President Joachim Nagel said that if there are signs that the Iran war is causing inflation expectations to exceed 2%, the European Central Bank is prepared to respond quickly.

Speaking at a conference in Gosslar, Germany, Nagel said that although monetary policy cannot prevent energy shocks from causing inflation to deviate from the target in the short term, if actual price increases have spillover effects that could influence medium-term trends, the ECB must take action.

He raised nearly 12 questions, from how long the Middle East conflict will last to how it might affect inflation and economic growth, highlighting the significant uncertainty faced by officials when formulating responses. Earlier that day, he indicated that the ECB should consider raising interest rates as early as next month.

One day after keeping rates steady at 2%, Nagel said, “We must remain highly vigilant.” He added, “Since we cannot reliably assess the medium-term impact on inflation at this point, a wait-and-see approach is appropriate. If necessary, we can respond swiftly.”

ECB President Christine Lagarde stated that the ECB is “well-positioned and fully capable” of responding to the impacts of the war.

Sources said that while Lagarde did not specify whether interest rates would be adjusted soon, policymakers are prepared to raise rates in April if inflation exceeds the target by too much.

“We have already seen during the Ukraine war that sharp rises in energy prices can lead to widespread inflation,” Nagel said. “The higher energy prices go and the longer they stay high, the greater the likelihood of this happening.”

He added that the ECB is currently “in a strong position” and “ready to act quickly and decisively if necessary.”