European Central Bank Governing Council member Joachim Nagel signaled support Tuesday for another interest rate hike as inflation remains above the bank's medium-term target.
Nagel, who also heads Germany's Bundesbank, told French daily Le Monde that financial markets correctly understand how the ECB is likely to respond at its Sept. 10 meeting.
"Markets are pricing in a probability of more than 95% that we will raise interest rates at our September meeting, and I would say that the markets have a rather good understanding of how we are likely to respond at this stage," he said.
The ECB is widely expected to raise its deposit facility rate by 25 basis points to 2.50%, following a quarter-point increase in June.
Annual consumer inflation in the euro area accelerated to 3.3% in August from 2.9% in July, reaching its highest level since September 2023, according to Eurostat figures released Tuesday.
"Inflation is not close to our medium-term target," Nagel said. "It stands at around 3% rather than 2%. And according to the June projections, inflation will return to 2% over the medium term only if interest rates are higher."
Nagel, however, refrained from offering guidance on possible moves after the September meeting, pointing to sharp fluctuations in energy prices, volatile financial markets and heightened uncertainty.
"Our meeting-by-meeting approach has served us well in the past and will certainly do so in the future," he said.
Nagel said higher borrowing costs cannot directly reduce oil prices, but monetary policy must prevent elevated inflation from spreading to wages and other parts of the economy.
He warned that the risk of second-round effects rises when inflation remains elevated for an extended period, saying trade unions could seek larger wage increases during next year's negotiations to offset higher living costs.
Addressing concerns that further tightening could weaken economic activity, Nagel said the ECB's mandate is to ensure price stability.
He added that the euro area economy has remained relatively resilient despite geopolitical and economic challenges, noting that second-quarter growth exceeded expectations and Germany's exports and manufacturing orders showed signs of resilience.
Nagel also said rising long-term borrowing costs in global financial markets had complicated the ECB's task as investors increasingly demand higher returns amid persistent uncertainty.
