ECB's Nagel: high inflation not yet setting off second-round effects

SORRENTO, Italy, Oct 5 (Reuters) - Euro ‌zone inflation is ​high ​and upward risks dominate but expensive energy has yet to feed through to wages and other prices, Bundesbank President Joachim Nagel said ‌on Monday.

Inflation in the 21-nation currency bloc is now running at ⁠3.8%, nearly double the ECB's 2% target and could still increase, fuelling worries that soaring energy ‌prices will eventually set off ‌hard-to-break second-round effects, perpetuating rapid price growth without aggressive central bank action.

"There are so far no clear signs that inflation has fed through to price ​and wage setting," Nagel said in a speech in Sorrento, Italy. "Longer-term market-based and expert expectations remain consistent with the Eurosystem’s 2% inflation target."

Still, Nagel did ⁠not sound the all-clear and warned that price pressures are expected to stay strong, even excluding volatile food ​and energy prices.

"Gas prices are especially vulnerable because storage levels are low, and Europe may need to buy substantially higher volumes ​during the winter," Nagel told a precious ‌metals conference.

"The destruction of refining capacity is driving up prices for refined petroleum products significantly. Drought, wildfires and fertiliser shortages also ⁠pose risks to food prices," Nagel added.

This long list of risks is why financial markets expect the ECB to raise its 2.5% deposit rate another two or three times ⁠in the coming year on top of two hikes this past summer.

Nagel, however, did not endorse ​market bets and merely said the ECB needed to be flexible and continue to make decisions based on incoming data.

Markets are pricing in a 20% chance of an interest-rate hike ‌by the ECB in October and an 80% chance of an increase in December, according to LSEG data.

Speaking about rising yields, ‌Nagel said this was increasing the relative attractiveness of bonds among reserve asset managers.

However, ⁠the case for diversification into gold ‌remains significant given continued ​geopolitical stress and the credit risk associated with high debt levels, he added.

(Reporting by Polina Devitt; writing by Balazs Koranyi, Editing by ‌Xevi Fontdegloria)

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