European Central Bank policymaker Martins Kazaks said the ECB may need to gradually raise interest rates further to curb inflation before energy price pressures transfer into wages across the eurozone.
The ECB raised its key rate Thursday to 2.5 percent from 2.25 percent, marking the second hike of the year. Kazaks, Latvia's central bank governor, signaled scope for additional moves as energy prices and headline inflation remain elevated.
"The case is building up for more tightening," Kazaks said in a phone interview.
The central bank currently describes the 2.5 percent rate as the upper end of a neutral range—a level that neither stimulates nor restrains growth. Kazaks clarified this is not a ceiling. "There is no unobservable threshold, or some higher bar to reach, for the rates to move above 2.50%," he said, indicating rates may need to wade into restrictive territory.
Eurozone inflation measured 3.3 percent in August, with the ECB forecasting a further rise to 3.6 percent in the fourth quarter. The economy is operating at capacity, meaning higher fuel costs could transfer more readily to consumer prices and wages.
"The output gap is closing, which means that pass-through to prices and wages may strengthen," Kazaks said, identifying this as a clear upside risk to inflation.
Negotiated wages in the eurozone rose 2.44 percent in the three months to June, down from 2.56 percent in the first quarter. Kazaks noted that inflation remains in an "inattention area" for consumers and businesses, but sensitivity could spike if price growth outpaces wage gains.
While Kazaks did not confirm a fresh October hike, he emphasized the ECB's ability to move incrementally. "If we move stepwise, we'll be well-positioned," he said, noting that past policy decisions allow the central bank to act without haste.
