ECB faces risk of runaway inflation expectations, Nagel says

Joachim Nagel, President of Germany's federal reserve Bundesbank is seen during a media tour at the Bundesbank headquarters in Frankfurt September 16, 2022. REUTERS/Heiko Becker/File Photo

FRANKFURT, Sept 26 (Reuters) - The European Central Bank must continue to raise interest rates decisively as the risk is high that inflation will get stuck at levels above its 2% target, Bundesbank President Joachim Nagel said on Monday.

Euro zone inflation, already above 9%, is expected to edge closer to double-digit territory later this year and will stay above 2% through 2024, an exceptionally long period that raises the risk rapid price growth will become entrenched.

"The risk that long term expectations get de-anchored remains high," Nagel said in a speech. "Further decisive action is required to bring the inflation rate down to 2% in the medium term."

When expectations are de-anchored, businesses and firms lose trust in a central bank's willingness to bring inflation under control and adjust with higher wage growth, thereby perpetuating rapid price growth.

The ECB has already raised its key rate by 125 basis points to 0.75%, the fastest pace of rate hikes in its history. Investors now expect its deposit rate to exceed 3% next year, the highest level since 2008, before the height of the global financial crisis.

Reporting by Balazs Koranyi; Editing by Catherine Evans

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