**Inflation Pressures Build as ECB Official Hints at Higher Rates**
The European Central Bank (ECB) is considering the possibility of further gradual interest rate hikes in response to rising inflation pressures, particularly influenced by the ongoing conflict in Iran, which is expected to drive up fuel costs. ECB policymaker Martins Kazaks, who also serves as the governor of Latvia’s central bank, conveyed these sentiments in a recent interview with Reuters.
On Thursday, the ECB raised its key interest rate from 2.25% to 2.5%, marking the second increase this year. Kazaks emphasized that the ECB must act to curb inflation before the effects of escalating fuel prices begin to permeate through to wages and other prices. He warned that the price pressures stemming from the Iran conflict could be persistent, leading to expectations of further policy tightening as early as October.
Kazaks noted that the current rate of 2.5% is at the upper limit of what the ECB considers a neutral range—one that neither stimulates nor restricts economic growth. However, he cautioned that this should not be viewed as a maximum threshold. “Interest rates may need to wade into restrictive territory,” he stated, indicating that there is no fixed limit to how high rates might go.
As inflation in the eurozone reached 3.3% in August, the ECB anticipates that this figure may rise in the coming months. Kazaks acknowledged that the economy is operating at full capacity, which could facilitate the transmission of higher fuel costs into broader price levels. He described the closing output gap as a factor that may strengthen the pass-through effect to prices and wages, presenting an upside risk to inflation.
While he refrained from confirming whether a new rate hike would occur in October, Kazaks expressed confidence in the ECB's ability to proceed “stepwise” and “without rush.” He highlighted that the ECB's previous decisions have positioned it well to manage the situation without haste or erratic movements.
Kazaks pointed out that although inflation is currently in what he termed the “inattention area” for consumers and businesses, this could change if essential goods such as fuel and food become significantly more expensive. He noted that these staples are everyday purchases that could heighten consumer sensitivity to inflation, especially if inflation outpaces wage growth.
In the eurozone, negotiated wages saw an increase of 2.44% in the three months leading up to June, a slight decline from the 2.56% rise recorded in the first quarter of the year. This wage growth, while positive, may not keep pace with rising prices, further complicating the economic landscape for consumers.
As the ECB navigates these challenges, the potential for additional interest rate hikes remains a focal point for both policymakers and market observers. The interplay between inflation, wage growth, and energy prices will likely shape the ECB's monetary policy decisions in the near future.