NextFin News - A September interest-rate increase by the European Central Bank is "very likely" — and it will not be enough to return inflation to target, according to Governing Council member Gediminas Simkus. The Lithuanian central banker's comments, made in an interview published Tuesday, mark one of the clearest hawkish signals from inside the ECB's rate-setting body ahead of its mid-September meeting, where policymakers face a hike-or-hold decision that could determine whether a single quarter-point move is the end of tightening or merely its first step.
"All the data currently available lead me to think that it's very likely that we will hike, and that this September hike is not going to be enough," Simkus, who chairs the Bank of Lithuania, said in an interview conducted Monday. "Overall the inflationary environment has strengthened, making the case for a hike pretty clear."
The intervention lands at a delicate moment for the euro area's monetary policy. The ECB's deposit facility rate — the key lever through which the Governing Council steers its stance — stands at 2.25%, held there since July after a June increase from 2.00% that marked the central bank's first rate rise in nearly three years. Rates remain far below the 4.00% peak reached in September 2023, when the bank was in the middle of its most aggressive tightening campaign in history. Inflation, meanwhile, has only just returned to the 2% target: the final reading for August stood at exactly 2.0%, before a flash estimate for September showed a rise to 2.2%, the highest level since April. The question Simkus raises is whether the Governing Council is prepared to treat a single 25-basis-point hike as the conclusion of the normalization cycle, or as the opening move of a longer climb back toward restrictive territory.
What Simkus Actually Said — And the Line He Drew at 50 Basis Points
The core of Simkus's argument is that the incoming data will force the ECB's own economic projections higher, and that a higher projected inflation path requires a higher rate path. He cited a specific chain of inflation drivers rather than speaking in generalities: gas futures prices rising, oil prices holding near June levels, the war in Ukraine disrupting wheat and grain exports from Russia and Ukraine, and agricultural commodity prices broadly climbing — all set against a European economy that he sees as "stronger and more resilient" than consensus assumes.
"With gas futures prices up, with oil prices mostly at the June levels, with the implications of the war in Ukraine on wheat and grain exports from Russia and Ukraine, with agricultural commodities (wheat, corn) prices generally going up, and with the European economy showing signs of being stronger and more resilient — this should lead to projections that would require the interest rate path to move up a bit in order to keep medium-term inflation at 2%," Simkus said.
That framing is the hinge of the whole argument. The ECB's most recent staff projections showed inflation averaging 2.1% in 2025, easing to 1.7% in 2026 before nudging back to 1.9% in 2027 — a path consistent with the current policy stance and, implicitly, with no sustained tightening cycle ahead. Simkus is warning that the September projection round, released alongside the September 17 policy decision, will show a materially different picture: one that requires "the interest rate path to move up a bit." That is language aimed beyond a one-and-done hike. It is a signal that he expects the terminal rate to be revised upward, not just the near-term trajectory.
But he drew a sharp line at the pace of that tightening. Asked whether a half-percentage-point move might be warranted, Simkus rejected the idea outright — a deliberate effort to separate "more tightening is needed" from "we are behind the curve and must sprint."
"Fifty basis points would require a really dramatic change in the inflation environment — something of the kind we saw after the pandemic," he said. "We are not in that situation, so we do have time to act and to take reasonable steps. A 50bp hike is definitely out of my scope."
He also said he did not believe the ECB was currently in danger of falling behind the curve. That is a notable detail, because "falling behind the curve" is the classic accusation leveled at central banks that tighten too slowly and then must overcorrect. In Simkus's telling, the case is for a measured 25-basis-point hike now, followed by additional moves as the data confirm, rather than an emergency-style acceleration. The distinction matters for markets: a central banker who rules out 50 basis points while insisting one hike is insufficient is arguing for a gradual, data-confirmed ascent — the kind that unfolds over quarters, not weeks.
The Domestic Inflation Problem That a Single Hike Cannot Fix
The most important part of Simkus's argument is not energy or food. Those components are cyclical, volatile, and reversible — the kind of shock a central bank can afford to look through if it does not contaminate the rest of the economy. The durable part is domestic price pressure, the component that monetary policy actually controls.
He pointed to core inflation "gradually increasing" and to elevated services inflation that he said was "reflecting persistent domestic price pressures, including those related to wage growth and domestic demand." The September flash data bore this out: services inflation ran at 3.2% year-on-year, up from 3.1% in August, while headline inflation climbed to 2.2% as energy's drag faded — energy was 2.0% cheaper than a year ago in August and only 0.4% cheaper in September. Goods prices rose just 0.8%, and month-on-month consumer prices edged up 0.1%.
That split is the transmission mechanism behind his "not enough" call. An energy shock that does not feed into wages and services can be absorbed. But once second-round effects take hold — workers demanding higher pay because groceries and fuel cost more, and service-sector firms passing those wage costs through to customers — inflation becomes embedded in the domestic economy. At that point, a single rate hike does not reset expectations; it merely acknowledges that the neutral rate sits higher than previously assumed.
Services inflation at 3.2% is the number that does the heavy lifting in Simkus's case. It is well above the 2% target, it is accelerating rather than decelerating, and it is the component least likely to reverse on its own. If his read is right, the ECB faces the same dilemma that kept the Federal Reserve higher for longer in the 2020s: headline inflation can sit at target while the underlying, policy-sensitive core keeps grinding upward, and the central bank that reacts only to the headline ends up behind the curve anyway.
There is also a wage-growth channel that Simkus flagged but did not quantify. The ECB's own tracker of negotiated pay deals pointed to wages rising 3% in 2025 before slowing to 2.6% in 2026 — a deceleration, but still a pace that, with productivity growth around 1%, leaves unit labor costs rising faster than is consistent with 2% inflation over a sustained period. Services firms — which are labor-intensive and less exposed to global competition than manufacturers — have the pricing power to pass those costs on. That is why "core gradually increasing" is more alarming to a hawk than a temporary energy spike: it is the signature of inflation that has moved from imported to homegrown.
Why Economic Resilience Makes the Inflation Case Harder, Not Easier
The conventional dovish argument against further tightening runs like this: the European economy is fragile, growth is weak, and fiscal support — not genuine strength — is propping up demand. Under that view, one hike is plenty, because tightening too far would break something that has not fully healed.
Simkus explicitly rejected that premise, and his reasoning is the second pillar of the hawkish case.
"I don't attribute the economic resilience solely to fiscal support. This would be too narrow an explanation for this situation," he said. "To some extent we fall into the trap of this narrative that the European economy is somehow inherently less competitive, more stagnant, etc. I think it's actually much more resilient than we typically realize."
He offered a structural explanation for the resilience rather than a cyclical one: reduced dependence on fossil fuels, the rising share of renewable energy, continued household spending, and manufacturers bringing production forward in the second quarter ahead of anticipated higher energy costs. "It's a mixture of factors explaining why the economy appears to be more resilient now than we were expecting a couple of months ago," he said. "But overall, I think we should have more confidence in the European economy than we typically do."
This is where the cyclical-versus-structural judgment does real work. If European growth resilience is cyclical — a sugar rush from fiscal transfers and front-loaded orders — then it will fade, the output gap will reopen, and the ECB can afford to be patient with a single hike. If it is structural — the result of a genuine energy transition, a more competitive industrial base, and households with intact balance sheets — then the economy can tolerate a higher rate path for longer without cracking, and the neutral rate itself is higher than the models assume. Simkus is betting on the latter. That bet is what converts "one hike" into "not enough," because a structurally resilient economy does not need the same protection from rates that a fragile one does.
The risk, of course, is that he is wrong on both counts — that the resilience is cyclical and the inflation is too. If household spending fades as pandemic-era savings exhaust and manufacturing orders normalize, then a multi-hike path would be tightening into a slowdown. That is the classic policy error in reverse: raising rates based on inflation data that is already rolling over and growth data that is about to disappoint.
Markets Are Already Doing Some of the Tightening
Simkus also addressed the recent rise in European long-term bond yields, a move that has already tightened financial conditions across the euro area even before the Governing Council votes. His read was notably relaxed — a deliberate signal that the ECB does not need to panic about market moves it did not engineer.
"It's very difficult to disentangle the precise reason," he said. "Various factors could explain the rise, starting with term premia, inflation, monetary policy expectations, changes in supply and demand, also potential implications coming from the U.S. Treasury market. I'm not particularly worried about it; I think this is a general market development reflecting a variety of things."
He acknowledged that the rise amounted to a tightening of euro-area financial conditions that the ECB must take into account, but framed it as partly a reflection of the changed inflation environment rather than a loss of confidence in policy. "To some extent, markets are already doing some of the tightening, which is then ultimately confirmed, if I can put it that way, by the ECB's decisions," he said.
That observation cuts both ways, and it is the second-order implication that most investors will miss. On one hand, it means the ECB does not need to do as much itself — the market has pre-tightened conditions through higher yields, so policy can move gradually. On the other hand, it means the Governing Council can afford to confirm in policy what markets have already priced, rather than racing to catch up. It is a justification for the 25-basis-point path Simkus favors, and a quiet argument against the kind of panic that a 50-basis-point move would signal.
The term-premium channel deserves attention here. When long-term yields rise on term premium rather than on rate expectations, the transmission works differently: borrowing costs for mortgages and corporate debt increase even if the policy rate stays put, and the central bank gets tightening "for free." Simkus's calmness about the bond market suggests he sees the yield rise as at least partly a healthy repricing of inflation risk — a market doing its job, not a market malfunctioning. That view lets the ECB move slowly while still achieving restrictive conditions.
On communication, Simkus backed the ECB's current meeting-by-meeting, data-dependent approach over any return to forward guidance. "We have to admit and be honest: the data are changing, and changing quickly, so this meeting-by-meeting, data-dependent approach is the right one and probably the only one that fits the situation," he said. That stance preserves flexibility — and makes it harder for markets to lock in a terminal rate with confidence, which is precisely what a data-dependent hawk wants.
The Counter-Case: One Hike May Be All the ECB Needs
The strongest argument against Simkus is straightforward, and it should not be dismissed as dovish wishful thinking: inflation is essentially at target. The August final reading was 2.0%, exactly at the ECB's medium-term goal, and the bank's own projections show inflation averaging 1.7% in 2026. From that vantage point, a September hike is a precautionary normalization move, not the start of a new tightening cycle. The September flash at 2.2% is heavily influenced by energy base effects — the comparison is getting harder as last year's energy-price collapse drops out — and may look transitory in hindsight.
The dovish case also rests on real rates. With inflation near 2% and the deposit rate at 2.25%, the ex-ante real policy rate is already modestly positive — around neutral by most estimates. Pushing significantly above neutral risks choking off a recovery that remains uneven across the euro area's largest economies. The ECB's president has signaled that the disinflationary process is largely complete and that the economy is "in a good place," language consistent with a shallow hiking cycle, not a sustained one. Officials have also repeatedly warned that they were "not entering into a new cycle of hikes" — a phrase that sits awkwardly with Simkus's "not enough" framing.
There is also the question of lags. Monetary policy works with long and variable delays, and the full effect of the June rate increase has not yet fed through to the real economy. A Governing Council that hikes again in September before seeing the impact of the last move risks over-tightening — the same mistake the Fed made in the 1970s, when it stopped and started so often that it lost credibility and ultimately had to do far more damage to wring inflation out.
And the falsifying signal for Simkus's thesis is concrete and observable. If core inflation — stripping out energy, food, alcohol, and tobacco — prints below 2.5% year-on-year for two consecutive months, and services inflation rolls over below 2.8% over the same period, the "September hike is not enough" argument loses its foundation. Those are the domestic, policy-sensitive components he himself flagged. If they cool while headline inflation hovers near 2%, the case for further tightening evaporates, and the September move becomes the whole cycle. Conversely, if core holds above 3% and services re-accelerates, the one-hike camp is wrong, and the terminal rate needs to move higher than currently priced.
What Comes Next
The immediate focus is the September 17 policy meeting, where a 25-basis-point increase in the deposit facility rate — taking it from 2.25% to 2.50% — is the base expectation among economists and money-market traders following the summer's data. The accompanying staff projections will be the real event: if they show a materially higher inflation path, Simkus's "not enough" framing gains institutional cover and opens the door to a second hike before year-end. If they confirm the most recent path, the one-and-done view prevails and attention turns to how long rates stay at 2.50%.
Split by time horizon, the picture is deliberately mixed. In the short term, the hawkish commentary supports the euro and keeps a floor under euro-area bond yields; the currency traded near 1.1592 against the dollar early Tuesday, little changed on the day. Over the medium term, the debate turns on the September projections and the next two core-inflation prints — the data that will confirm or refute whether domestic price pressure is re-accelerating. Over the long term, the structural question Simkus raised — whether Europe's economy has genuinely become more resilient through its energy transition — will determine where the neutral rate actually sits, and therefore how far any hiking cycle ultimately needs to go.
Three scenarios frame the path from here. The base case is a 25-basis-point hike in September, with the Governing Council reserving the option to move again if the projections and core data cooperate — a gradual, confirmed ascent rather than a sprint. The upside case for hawks is that core and services inflation hold above 3% and energy stays elevated, forcing a second hike in the fourth quarter and pushing the terminal rate toward 3.00%. The downside case is that energy base effects fade faster than expected, core rolls over below 2.5%, and September is the last move of the cycle, leaving the ECB on hold into 2027.
Simkus's intervention is a reminder that at the ECB, as at every major central bank, the fight is never just about the next meeting. It is about the path — and one Governing Council member is already signaling that the path does not end in September. The market's job over the coming weeks is to decide whether he is reading the data correctly, or whether the resilience he sees is a mirage that a single hike will be enough to puncture.
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