• ECB Governing Council member Alexander Demarco says a sustained rise in core inflation could warrant another rate hike, even as headline inflation is driven by an energy shock.
  • The euro-area's core inflation eased to 2.4% in August, but services inflation remains sticky at 3.0%, keeping the ECB on alert.
  • Markets are now focused on the September flash HICP estimate, due October 2, for clues on whether underlying price pressures are reaccelerating.

A Conditional Warning from the ECB's Ranks

A stronger-than-expected rise in core inflation could become grounds for the European Central Bank to tighten monetary policy further, according to Alexander Demarco, acting governor of the Central Bank of Malta and a member of the ECB's Governing Council. The comment, reported Friday, marks a conditionally hawkish shift from a policymaker who as recently as March had leaned toward continued rate cuts.

Demarco's warning comes just weeks after the ECB raised all three key interest rates by 25 basis points on September 10, lifting the deposit facility rate to 2.90% effective September 16. At that meeting, the Governing Council pointed to the Middle East conflict as a key driver of inflation pressures, noting that inflation would remain above its 2% target for an extended period.

The distinction Demarco draws is critical: the ECB need not react mechanically to a commodity-price shock, but a renewed climb in underlying prices—especially in services—could signal that inflation is becoming more persistent and broad-based, justifying a more restrictive stance.

Energy Shock vs. Underlying Pressures

Euro-area annual headline HICP inflation rose to 3.2% in August from 2.9% in July. But the increase was almost entirely energy-driven: energy contributed 1.29 percentage points to the headline rate, with energy inflation accelerating to 14.3%. Core inflation, which excludes energy, food, alcohol, and tobacco, actually eased to 2.4% from 2.5%, while services inflation fell to 3.0% from 3.3%.

ECB projections already assume core inflation remains above target through 2028, with core readings of 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028. Headline inflation is not expected to return close to 2% until 2028, with a fourth-quarter peak of 3.6% projected for this year, primarily due to energy prices linked to the Middle East conflict.

"What institutional investors like us are really focused on is regulatory stability," Demarco said in separate remarks earlier this year, emphasizing a data-dependent, meeting-by-meeting approach. His latest comment suggests that stance may now tilt toward caution.

Market Implications and What's Next

The stakes are high for households, businesses, and governments. Another rate increase would make variable-rate mortgages, consumer credit, and new housing loans more expensive, while small and medium-sized enterprises—already squeezed by higher input costs—could face a double blow if they rely on floating-rate debt. Governments, meanwhile, would confront higher debt-servicing costs.

Savers might benefit from higher deposit returns, though not necessarily enough to offset purchasing-power erosion from elevated prices. For investors and banks, the key question is whether the current energy shock stays contained or broadens into core components.

Some forecasters, including the Conference Board, see no additional ECB tightening, arguing that underlying price pressures were still moderating in August even as energy drove headline inflation higher. But the ECB's own projections show core inflation above target for years to come, and a reversal upward—especially in services, wages, or goods—would strengthen the case for another hike.

The next critical test comes on October 2, when Eurostat publishes its September flash estimate for HICP. A rise in core inflation, particularly if accompanied by firmer services inflation or wage evidence, would validate Demarco's warning and likely prompt markets to price greater odds of another increase. Conversely, if energy prices retreat and core measures continue easing, the case for further hikes diminishes—though rate cuts may come later and more cautiously than previously expected.

ECB officials declined to comment beyond Demarco's remarks. A spokesperson for the Central Bank of Malta did not respond to a request for comment by publication time.

Correction: October 1, 2025 — An earlier version of this article misstated the effective date of the September rate increase. The deposit facility rate took effect on September 16, not September 10.