European Central Bank policymaker Joachim Nagel remains worried about the inflation outlook, but his latest comments do not sound like a signal that the central bank needs to rush into another rate hike later this month, according to a report by ForexLive.

Nagel's assessment carries particular weight in this debate: as president of Germany's Bundesbank, he holds a seat on the ECB's Governing Council, the body that sets euro area interest rates, making him one of the voices that will ultimately decide whether the bank moves again this year.

His main points were:

• Inflation risks remain tilted to the upside
• Higher energy prices could keep inflation elevated for longer
• There are no clear signs of second-round effects taking hold just yet
• Longer-term inflation expectations remain broadly anchored around the ECB's 2% target
• The ECB should remain flexible and respond to incoming data

The main takeaway is that Nagel signalled there is still an absence of "inflation feeding through to price and wage setting." That plays down concerns about second-round effects and suggests the ECB has more room to wait in October, even as policymakers keep the door open to another move later this year.

As things stand, the ECB continues to want to avoid the temporary energy shock turning into something more persistent. With euro area inflation already hitting 3.8% in September, the risks of that are growing. If companies start passing those costs through more aggressively and workers respond by demanding higher wages, inflation becomes much harder to bring back down. For now, at least, Nagel maintains that point has not been reached.

That assessment fits with current market pricing, which implies roughly a 79% chance of no rate hike in October. December, however, is a different story: markets still price around a 66% chance of a rate hike by then.

Nagel's comments can also be read the other way. He maintained that inflation risks are still tilted to the upside and that the central bank should be flexible in responding to the latest economic developments. In other words, the remarks carry a heavy suggestion of an argument for patience. ForexLive framed it as a hint that October looks more and more like a pause, while December remains very much in play.

With the ECB explicitly committed to a data-driven approach, attention now turns to the euro area inflation and wage readings due in the coming weeks, which are set to shape the Governing Council's deliberations ahead of the December meeting.

Source: ForexLive