ECB's Nagel Warns of Persistent Inflation Risks Despite No Second-Round Effects

European Central Bank (ECB) Governing Council member and Deutsche Bundesbank President Joachim Nagel addressed inflation concerns during a precious metals conference in Sorrento, Italy, on October 5th. While acknowledging that Eurozone inflation remains high at 3.8%, nearly double the ECB's 2% target, Nagel emphasized that there are currently no clear signs of second-round effects, where rising energy prices lead to broader wage and price increases. He also noted that long-term inflation expectations align with the ECB's target.

Despite this, Nagel warned that upward price pressures persist, even excluding volatile food and energy prices. He highlighted several risk factors, including low gas storage levels, reduced refining capacity, droughts, wildfires, and fertilizer shortages, all of which could keep inflation elevated. However, Nagel refrained from endorsing market expectations of further rate hikes, stating that the ECB must remain flexible and base decisions on incoming data.

Financial markets currently anticipate two to three additional rate hikes over the coming year, with a 20% probability of a hike in October and an 80% probability in December. The ECB had already raised the deposit rate to 2.5% earlier this summer.

In his speech, Nagel also discussed reserve asset management, emphasizing that gold remains a valuable diversification asset amid geopolitical tensions and high debt levels, despite rising bond yields.