ECB’s Nagel Warns of Persistent Inflation Risks Despite Stability Signs

Bundesbank President Joachim Nagel has expressed cautious optimism about Euro zone inflation, stating that while it remains high at 3.8%, nearly double the European Central Bank’s 2% target, there are no clear signs yet of second-round effects where rising prices feed into wages and other costs. Speaking at a precious metals conference in Sorrento, Italy, Nagel noted that longer-term inflation expectations still align with the ECB’s target, but he warned that price pressures could persist, especially with volatile energy and food prices.

Nagel highlighted several risks, including low gas storage levels, reduced refining capacity, drought, wildfires, and fertilizer shortages, all of which could drive up prices further. Despite these concerns, he did not endorse market expectations of additional ECB interest rate hikes, emphasizing the need for flexibility based on incoming data. Markets currently price in a 20% chance of an October rate hike and an 80% chance in December.

Turning to financial markets, Nagel observed that rising bond yields are making fixed-income investments more attractive. However, he stressed the ongoing importance of diversification into gold due to geopolitical tensions and the risks associated with high debt levels.