The future direction of European interest rates will be heavily influenced by energy prices, according to the head of Germany's central bank.

In an interview on Friday, Bundesbank President Joachim Nagel stated that energy costs will determine whether the European Central Bank needs to push rates into restrictive territory. His comments came a day after the ECB raised its key interest rate by 25 basis points to 2.5%.

"The path ahead depends to a large extent on how energy prices develop and how the overall price situation evolves over the next month or so," Nagel said.

His remarks coincide with oil prices sustaining elevated levels. On Friday morning, both global benchmark Brent crude and US West Texas Intermediate (WTI) were trading above $100 per barrel. European natural gas prices are also under pressure, with Dutch TTF gas futures reaching their highest point since 2022.

Nagel noted that he believes the current rate is at the upper end of the neutral range—the level at which monetary policy neither stimulates nor restricts economic growth—but he did not rule out moving into a "mildly restrictive territory."

When asked whether there is room for one or two more rate hikes in this cycle, Nagel responded: "It's too early to speculate. We saw oil prices rise last week, and crude is now approaching $110 a barrel."

"Markets have been highly volatile over the past month. Yesterday's rate move was a response based on our projections. The direction of energy prices in the coming weeks and months remains uncertain, so policy will depend on those changes. I will reassess when we meet next."

Nagel also expressed confidence regarding Europe's natural gas storage levels heading into winter, which are relatively low. He added that the current situation is not comparable to the 2022-2023 energy crisis, as there are now more diversified channels for procuring liquefied natural gas (LNG).