ECB policymaker Martins Kazaks says the case is building for further interest-rate increases as an Iran conflict-driven jump in fuel costs threatens to spread into wages and prices. The central bank raised its key rate to 2.5% on Thursday and Kazaks argues that level is not a ceiling.
Martins Kazaks, Latvia's central bank governor and a European Central Bank policymaker, says the ECB may need to keep raising interest rates gradually to curb inflation before an Iran war-driven rise in fuel costs feeds through to wages and other prices. He made the comments in a phone interview with Reuters.
The ECB raised its key rate to 2.5% from 2.25% on Thursday, the second increase this year, and warned that price pressure from the Iran conflict could prove lasting. That warning has fuelled bets on further tightening as soon as October.
Kazaks sees room for more hikes
Kazaks sees scope for further, incremental rate hikes as energy prices and broader inflation stay elevated. According to Reuters: "The case is building up for more tightening", he said in the interview.
He added that 2.5%, which the ECB has described as the upper end of a neutral range that neither stimulates nor curbs growth, should not be treated as a ceiling. Interest rates may need to move into restrictive territory, he said, adding there is no unobservable threshold or higher bar the rate needs to clear to move above 2.5%.
Euro zone inflation stood at 3.3% in August, and the ECB expects it to rise further in the coming months.
No rush, but no ceiling either
Kazaks would not say whether a fresh hike could come as soon as October, but he said the ECB can afford to move stepwise and without rush. He said that approach would leave the bank well positioned, crediting past decisions that have proven appropriate for allowing it to act without jumpiness.
He also pointed out that the euro zone economy is running at capacity, so higher fuel costs might pass through to prices more easily. The output gap closing means pass-through to prices and wages may strengthen, he said, calling that an upside risk to inflation.
Kazaks argued that inflation, which the ECB puts at 3.6% in the last quarter of this year, remains an area consumers and businesses are not focused on, but that could change if staples such as fuel and food become even more expensive. Those items may increase sensitivity to inflation, more so if inflation exceeds wage growth, he said.
Negotiated wages rose 2.44% in the euro zone in the three months to June, compared with a 2.56% increase in the first quarter of the year.
Source: Investing.com
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