Will the ECB Raise Rates Again? Energy Prices Put Nagel’s Inflation Test in Focus

The Middle East conflict has raised oil and gas costs and complicated the European Central Bank’s inflation outlook. On September 10, 2026, the ECB raised its three key rates by 25 basis points, taking the deposit rate to 2.5%. Its new projections put average euro-area inflation at 3.0% in 2026 and 2.5% in 2027—both above its 2% target. The question now is whether the energy shock will fade or become embedded in other prices. 1719

Nagel leaves the door open, but sets a condition

Bundesbank President Joachim Nagel described rates after the September hike as being at the upper end of neutral territory: a level he does not consider clearly stimulative or restrictive. He has not ruled out moving into mildly restrictive territory, where rates would begin to curb economic activity. But he made that possibility conditional on how energy prices and the broader inflation picture develop. 1114

Oil has become a more important policy indicator, Nagel said in late September, though it is not the only one. He also considers core inflation too high. A sustained rise in fuel costs would therefore strengthen the case for another hike, but an oil-price move by itself does not settle the decision. 28

The crucial test is whether inflation spreads

Nagel welcomed a slowdown in core and services inflation in August and said he was not yet seeing second-round effects in core inflation. Those effects would matter because they signal that an initial energy shock is feeding into wider price-setting rather than remaining concentrated in energy. 4

He has since said he is less concerned about a strong wage response than he was during the previous inflation episode, while cautioning that the longer the shock persists, the greater the risk of second-round effects. He has also said current labour-market developments are not a major concern. That is a reason to watch incoming data, not proof that the inflation risk has passed. 710

Lane’s forecast and market bets are not rate commitments

ECB chief economist Philip Lane expects a second wave of oil and gas price increases to keep inflation higher for longer, before it starts moving back toward target from around mid-2027. That does not mean inflation will reach 2% by then, or that a particular number of rate hikes is required. The ECB’s September baseline likewise projects inflation averaging 2.5% across 2027. 17

Investors have taken a more aggressive view of the rate path: by late September, Reuters reported expectations of another three or four moves over the following year. That is market pricing, not ECB guidance. 2

ECB President Christine Lagarde has cautioned that interest rates do not move in lockstep with energy prices, which can also affect growth and consumption. Vice-President Boris Vujčić has likewise argued for weighing a wider set of economic indicators rather than treating higher oil prices as an automatic trigger. Lagarde said the ECB had not debated its future rate path when it made the September decision. Together, those positions leave further tightening possible while keeping the next decision dependent on the evidence. 19