ECB's Nagel suggests December rate hike still possible despite October pause signals

ECB policymaker Joachim Nagel continues to express concerns over the inflation outlook, though his recent remarks do not appear to indicate the central bank must hurry into another rate increase later this month.

His key points on Friday were:

• Inflation risks remain skewed to the upside
• Higher energy costs could keep inflation elevated for a longer period
• Clear signs of second-round effects have not yet emerged
• Longer-term inflation expectations remain largely anchored near the ECB's 2% target
• The ECB should stay flexible and react to incoming data

The central takeaway is that Nagel indicated there is still a lack of "inflation feeding through to price and wage setting". That downplays fears about second-round effects and suggests the ECB has more leeway to hold off in October, even as policymakers keep the possibility of a further move later this year open.

As it stands, the ECB remains determined to avoid the temporary energy shock turning into a more lasting phenomenon. With euro area inflation already at 3.8% in September, the risks of that are increasing. If companies start passing those costs on more aggressively and workers respond by demanding higher wages, inflation becomes far harder to bring down.

But for now at least, Nagel maintains that we are not at that point yet.

That aligns with market sentiment, which sees roughly a 79% probability of no rate hike in October. However, December presents a different picture.

Markets still price in around a 66% chance of a rate increase by then, and that is where Nagel's comments can also be interpreted differently. He reiterated that inflation risks remain tilted to the upside and that the central bank should remain flexible in responding to the latest economic data.

In other words, there is a strong implication there of sounding more like an argument for patience.

I would characterise it as a hint that October increasingly looks like a pause. Meanwhile, December remains very much in play.