Bundesbank's Nagel warns inflation to stay above 2% target

Bundesbank President Joachim Nagel warned inflation will remain "significantly above target" for an extended period, pushing back against expectations the European Central Bank can ease policy anytime soon. The German central bank chief spoke to CNBC on the sidelines of the ECB's annual monetary policy conference in Sintra, Portugal on Tuesday, striking a hawkish tone as the euro area contends with price pressures that have proven more persistent than anticipated.

The ECB raised its benchmark rate by a quarter point to 2.25% on June 11, the first rate move in a year, with euro area annual inflation at 3.2% in May — well above the central bank's 2% target. ECB President Christine Lagarde defended the increase on Monday, saying without it inflation could have lingered above 2% into 2028. "Some have characterized our rate increase earlier this month as an 'insurance hike,'" Lagarde said. "I'm sorry to disappoint them. That is not an accurate description. We faced an outlook of rising headline and core inflation."

The central bank now projects inflation will return to 2% only in the final three months of 2027, a timeline reflecting the persistence of price pressures even after the most aggressive tightening cycle in the ECB's history. The ECB responded to Russia's cutoff of gas supplies with "the fastest tightening cycle in our history, raising rates in increments we had never used before," Lagarde said. Now, with rates at 2.25%, the bank has shifted to a more calibrated approach. "We no longer need to act with the same force," she said. "We can make measured adjustments to rates, calibrated to the shocks we face."

The inflation outlook faces additional uncertainty from two external shocks. The Iran war has disrupted oil and gas supplies through the Strait of Hormuz, sending energy prices fluctuating, while US President Donald Trump's tariffs on European imports have added costs for exporters. Lagarde said the ECB's forecasters now use scenarios of milder and harsher outcomes to geopolitical events to ensure the bank does not overreact or underreact. Despite these headwinds, the European economy has held up better than many expected, she added.

Nagel's hawkish warning suggests the Bundesbank — traditionally the ECB's most inflation-hawkish member — sees limited scope for rate cuts in the near term. The ECB's next rate-setting meetings are scheduled for July 22-23 and Sept. 9-10, with markets likely to scrutinize forward guidance for any shift in the policy trajectory. The Sintra conference has historically served as a key platform for ECB policymakers to signal their intentions before the summer recess, giving Nagel's comments added weight for market expectations.

The hawkish commentary could strengthen the euro against major peers, push European government bond yields higher and dampen risk appetite for European equities. The comments point to the potential for continued monetary tightening, which may slow economic growth in a region already navigating energy disruption and trade friction. The ECB's measured approach means each meeting carries heightened significance as policymakers calibrate their response to evolving data, with the July 22-23 gathering now the next key test for market positioning.

This article is for informational purposes only and does not constitute investment advice.