ECB must prevent inflation surge from becoming entrenched, Nagel says

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.

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 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 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."

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.

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.

"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)

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