(Bloomberg) -- The European Central Bank must be on high alert to factors that could keep inflation more elevated than predicted, Governing Council member Joachim Nagel said, singling out the labor market as a source of concern.

“It’s imperative to remain vigilant,” the Bundesbank president said Tuesday in a speech in London. “Monetary-policy measures take time before their full effect becomes visible. There’s a lot of uncertainty surrounding the outlook, and we still face risks that the inflation outlook could turn out higher than expected.”

The ECB left interest rates on hold last month for the first time since it embarked on a historic hiking campaign in July 2022. That move “appears justified,” according to Nagel, as policymakers have achieved a “reasonable degree of tightening” and inflation pressures have subsided. 

Price growth in the 20-nation euro area slowed to less than 3% in September, but energy costs and pay increases are still seen as key risks to the outlook. The ECB currently predicts a return to the 2% goal only in the second half of 2025. 

While investors and analysts don’t expect any more rate increases from the ECB, Executive Board member Isabel Schnabel has also refused to rule out more tightening in case of new shocks. 

“Lively wage growth combined with a decreasing labor supply will keep the pressure up,” Nagel said. “The Governing Council will continue to follow a data-dependent approach. And it will continue to be guided by a clear objective: We’ll maintain a sufficiently high level of the monetary-policy rate for as long as necessary to ensure that inflation returns to 2%.”

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