European Central Bank Governing Council Member Nagel: Energy inflation worsens, continued rate hikes in July should not be ruled out

European Central Bank Governing Council member Nagel commented on June 12: The secondary effects of energy prices on other prices are increasingly intensifying, and the ECB has kept all options open for a rate hike in July.
(Background: The European Central Bank (ECB) has restarted rate hikes! For the first time in nearly three years, it raised interest rates by 1 basis point, as inflation rebounded after fighting broke out in the Middle East.)
(Additional context: U.S. May CPI surged to 4.2%! A spike in energy prices is the culprit behind inflation, and the expectation for a rate hike in December this year has reached 42.5%.)

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• Behind the rate hike: The “second-round effects” of energy prices
• A rate hike of 25 basis points just the night before
• Comparison with Taiwan’s situation
• How the market is pricing in

European Central Bank (ECB) Governing Council member Nagel stated on June 12: High energy prices are increasingly amplifying the indirect impact on other prices, and the ECB is ready at any time to raise rates again in July.

In an interview with the German business daily Handelsblatt conducted in Berlin, Nagel said, “We have kept all options open for July. Once needed, we will be prepared to respond again at any time.”

Behind the rate hike: The “second-round effects” of energy prices

The key point Nagel stressed this time is not energy prices themselves, but the “second-round effects” (second-round effects) from energy costs flowing upward to upstream sectors. Simply put, rising oil prices push up transportation costs, and when transportation costs rise, they in turn lift the prices of retail goods and services; inflation then spreads from energy to the broader economy.

The data confirms this assessment: In May, the eurozone’s overall inflation rate rose to 3.2%, while energy prices increased by 10.9% year over year. More importantly, core inflation—excluding food and energy—also rose to 2.5%, indicating that inflationary pressure has penetrated into the wage and service cost layers, not just energy markets.

In a report released at the end of May, Goldman Sachs European economist Sven Jari Stehn pointed out that since the March meeting, the energy price index (average of oil and gas) has risen by about 12%. “Core inflation forecasts are even more interesting—especially for 2027—because they can tell us how confident the ECB is about the persistence of the second-round effects.”

A rate hike of 25 basis points just the night before

Nagel’s comments came less than 24 hours after the ECB made its rate decision on June 11. This was the first rate hike since 2023—the deposit facility rate was raised from 2.00% to 2.25%, and the main refinancing rate and marginal lending rate were increased to 2.40% and 2.65%, respectively.

The rate hike was in line with market expectations, but Nagel’s remarks added a clear hawkish signal to the July decision. According to a Reuters report on June 11, multiple ECB officials have already pinpointed July as a possible timing for the next rate increase, though some officials prefer to pause and wait and see in July.

Comparison with Taiwan’s situation

Taiwan’s inflation picture has similarities to the eurozone’s: Data from Taiwan’s Directorate-General of Budget, Accounting and Statistics shows that Taiwan’s CPI year-over-year growth rate has also remained above 2% for several consecutive months, with energy prices likewise being a key driver. However, Yang Chin-yuan, governor of the Taiwan central bank, said he expects inflation to “moderately ease” in the second half of the year, implying that there is no need to adjust interest rates for the time being.

If the ECB continues to raise rates in July while Taiwan holds steady, the interest-rate spread between the Taiwan dollar and the euro will narrow further, which may affect foreign investors’ capital allocation into Taiwan’s stock market. Investors may want to pay attention to the ECB’s decision-making meeting on July 17, as well as the signals from Lagarde’s press conference.

How the market is pricing in

• Data from the London Stock Exchange shows the market is pricing in three rate hikes by the ECB before the end of the year
• UBS analysts believe there is upside risk to the expectation of two rate hikes by the ECB this year—meaning it could actually be 3 rate hikes
• Deutsche Bank is comparatively cautious, estimating that the ECB will keep its interest-rate path largely unchanged from what the market is pricing

Nagel’s hawkish remarks provide support for expectations of at least 1–2 more rate hikes before the end of the year. If energy prices continue to rise in July, the ECB does not rule out a second consecutive rate hike within just a month.