The European Central Bank may be forced to raise interest rates due to a war with Iran, Bundesbank President Joachim Nagel said.
"I still hope for a significant de-escalation of tensions in the Middle East – but we cannot ignore high energy prices," Nagel said in an interview with Handelsblatt. "An interest rate hike is becoming increasingly likely unless the inflation picture changes dramatically."
Economists expect two rate hikes in 2026 – in June and September – while markets are pricing in a third hike by the end of the year. The decision at next month's meeting will coincide with the publication of new economic forecasts.
"We are no longer in the baseline scenario of the Eurosystem's forecasts, but are moving towards an unfavorable scenario," Nagel said, referring to the different growth and inflation trajectories outlined by the ECB in March.
Nagel warned of possible additional inflationary pressure. "The price rises are likely to extend beyond fuel," Nagel said. "We know from past experience that a supply shock can easily spread to all product categories within 18 months."
Nagel, considered one of the most hawkish members of the ECB Governing Council, noted that the weak eurozone economy could influence next month's decision.
"Nobody likes raising rates when economic growth is under serious pressure," he said. "But our mandate is price stability. And in the long run, it's better for everyone if it's clear that we're serious about our inflation target and keeping inflation close to 2% over the medium term. We'll do our job—without any reservations."