Finance
ECB Must Prevent Inflation Surge From Becoming Entrenched, Nagel Says
Published by Global Banking & Finance Review®
Posted on March 20, 2026
2 min readLast updated: March 20, 2026
Quick Summary
Bundesbank President Joachim Nagel warned the ECB must be ready to tighten policy if energy-driven inflation generates persistent second‑round effects, even as rates were held steady. Markets now expect at least two hikes this year amid rising price risks from the U.S.‑Israeli war on Iran.
ECB Urged to Prevent Inflation Surge from Becoming Entrenched: Nagel
ECB Policy Response to Rising Inflation Risks
Energy Costs and Inflation Dynamics
FRANKFURT, March 20 (Reuters) - A sharp rise in energy costs could fuel broader inflation in Europe and the European Central Bank must tighten policy if such "second-round" impacts become apparent, Bundesbank President Joachim Nagel said on Friday.
ECB's Recent Decisions and Market Expectations
The ECB kept interest rates unchanged on Thursday but raised its inflation projections and warned about mounting price risks due to the U.S.-Israeli war on Iran, bolstering market bets for at least two rate hikes this year.
Nagel's Stance on Rate Hikes
Nagel did not explicitly back a hike, but he warned that the higher inflation rises and the longer it is expected to stay above target, the more likely it is to create dangerous second-round effects.
Monetary Policy and Second-Round Effects
"Monetary policy cannot prevent a short-term rise in inflation resulting from an energy price shock," Nagel said in a speech. "However, it must act when second-round effects become apparent and longer-term inflation expectations rise above the inflation target, because then high inflation threatens to become entrenched."
Future Policy Considerations
Policymakers speaking on condition of anonymity said that a rate hike will need to be discussed in April if the war continues, even if a move in June appears more likely for now.
Wait-and-See Approach
Nagel argued that the medium-term consequences of the inflation surge cannot yet be assessed, so a wait-and-see approach was appropriate, especially since the ECB can react quickly, if needed.
Commitment to Inflation Target
"We are determined to stabilize the inflation rate at 2% over the medium term," he said. "It is crucial to remain highly vigilant in monetary policy."
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
Key Takeaways
- •Energy cost shock may spur broader inflation and risk entrenching higher inflation expectations if second‑round effects emerge
- •ECB maintained steady rates on March 19, but elevated inflation forecasts and geopolitical risks have increased odds of two or more rate hikes this year
- •Nagel endorsed a data‑dependent, wait‑and‑see stance—ready to act if medium‑term inflation becomes unanchored
Frequently Asked Questions about ECB must prevent inflation surge from becoming entrenched, Nagel says
1Why is the ECB concerned about energy cost rises?
A sharp rise in energy costs could trigger broader inflation in Europe, prompting the ECB to closely monitor for potential second-round effects.
2What are second-round effects in inflation?
Second-round effects refer to the impact of sustained inflation expectations leading to entrenched high inflation beyond short-term price shocks.
3What conditions might prompt the ECB to tighten monetary policy?
The ECB may tighten policy if second-round inflation impacts become apparent and longer-term inflation expectations rise above the bank's target.
4Has the ECB raised interest rates recently?
The ECB kept interest rates unchanged but raised its inflation outlook, heightening market expectations for possible rate hikes within the year.
5What is the ECB’s inflation target?
The European Central Bank aims to stabilize the inflation rate at 2 percent over the medium term.
