FRANKFURT: The European Central Bank (ECB) may need to gradually raise interest rates further to curb inflation before an Iran war-driven rise in fuel costs starts seeping through to wages and other prices, ECB policymaker Martins Kazaks says.
The ECB raised its key rate last Thursday – to 2.5% from 2.25% – for the second time this year and warned that price pressures from the Iran conflict could prove lasting, fuelling bets on more policy tightening as soon as October.
Kazaks, Latvia’s central bank governor, saw scope for more, incremental hikes as energy prices and broader inflation stay elevated.
“The case is building up for more tightening,” he said in a phone interview.
Kazaks added that 2.5%, which the ECB has described as the upper end of a neutral range which neither stimulates nor curbs growth, should not be seen as a ceiling.
“Interest rates may need to wade into restrictive territory,” he said.
“There’s no unobservable threshold, or some higher bar to reach, for the rates to move above 2.5%.”
Eurozone inflation stood at 3.3% in August and the ECB expects it to rise further in the coming months.
Kazaks would not be drawn on whether a fresh hike may already come in October but he said the ECB could afford to move “stepwise” and “without rush”.
“If we move stepwise, we’ll be well-positioned. “Thanks to past decisions that have proven appropriate, so far we can afford to act without rush or jumpiness.”
The Latvian policymaker pointed out that the eurozone’s economy was running at capacity, so higher fuel costs might be passed on more easily.
“The output gap is closing, which means that pass-through to prices and wages may strengthen,” he said. “That is clearly an upside risk to inflation.” — Reuters
