FRANKFURT, May 12 (Reuters) - European Central Bank interest rate hikes are becoming increasingly likely, unless there is a fundamental change in the inflation outlook, Bundesbank President Joachim Nagel told German newspaper Handelsblatt.
The ECB debated a rate hike already last month and signalled that a move in June was likely since high energy prices have already pushed inflation well above its target and it was only a matter of time before this increase starts to generate second-round impacts,
perpetuating rapid price growth.
"We cannot ignore high energy prices," Nagel was quoted as saying in an interview published on Tuesday. "Interest rate hikes are becoming more and more likely if the inflation picture does not fundamentally change."
"We're no longer in the baseline scenario of the (ECB's)projections and are moving towards the adverse scenario," he said.
The ECB's 'baseline' projection sees inflation peaking at 3.1% in the second quarter while the 'adverse' outcome would see it rising to 4.2% in the fourth quarter. Both see it back at or below target next year.
The baseline, done based on market pricing at the time, already assumes two interest rate hikes, which is still less than the three moves priced into financial markets.
Nagel argued that even if the war in Iran ended soon, euro zone inflation rate could remain elevated for much longer than policymakers thought only a few weeks ago.
This is because the war destroyed refinery capacities, reduced inventories, disrupted supply chains, while also increasing geopolitical uncertainty.
"Our mission is price stability," said Nagel, a potential candidate to replace ECB President Christine Lagarde next year.
"In the longer term, it is better for everyone if it is clear that we take our inflation target seriously and keep the inflation rate close to 2% in the medium term."
(Reporting by Balazs KoranyiEditing by Gareth Jones)
