The European Central Bank could raise interest rates at its next policy meeting, Bundesbank President Joachim Nagel said on Tuesday, citing elevated inflation in the euro area. Speaking at a press conference on the sidelines of the G20 finance gathering in Asheville, U.S., Nagel noted that markets appear to be correctly anticipating a move at the September 10 decision in Berlin. He added, however, that the ECB will continue to take a data-dependent approach, leaving room for further adjustments beyond the upcoming meeting.
Eurozone inflation accelerated to 3.3% in August, the highest level in three years, driven partly by energy price spikes linked to the conflict in Iran. The ECB targets a 2% inflation rate, and the latest increase puts price growth well above that objective. Nagel highlighted a partial positive development: core inflation, excluding volatile energy and food prices, edged down to 2.4% from 2.5% previously. This suggests limited signs of second-round effects such as a wage-price spiral that could entrench inflationary pressures.
Financial markets are pricing in a quarter-point increase in the ECB’s deposit facility rate to 2.50%, a move Nagel did not rule out. The decision will be made at the central bank’s out-of-frankfurt session in Berlin, where policymakers face the challenge of balancing persistent price pressures against a fragile growth outlook.
Separately, Nagel cautioned the German government against complacency over the country’s top-tier AAA credit rating. Speaking alongside Finance Minister Lars Klingbeil, he stressed that maintaining fiscal credibility remains critical, noting that Germany’s deficit performance—while still relatively contained compared with peers—has deteriorated. The general government deficit widened to €71.3 billion in the first half of the year, up €36.6 billion from a year earlier, equivalent to 3.1% of gross domestic product. This breached the EU’s 3% fiscal deficit ceiling, a threshold last exceeded in the first half of 2021 during the pandemic.
Nagel acknowledged improved growth prospects as a mitigating factor but warned that sustained fiscal discipline is necessary to retain market confidence. All major rating agencies currently assign Germany the highest credit rating, enabling the state to borrow at relatively low costs despite the rising deficit.
