ECB May Need More Rate Hikes as Iran Conflict Fuels Energy Costs

The European Central Bank may need to raise interest rates further to combat inflation as energy costs linked to the Iran conflict pose a growing risk of feeding into wages and consumer prices, according to ECB policymaker Martins Kazaks.

Kazaks, also governor of Latvia's central bank, suggested that there is scope for additional incremental rate increases given elevated energy prices and underlying inflation. He indicated that the current 2.5% interest rate should not be treated as a ceiling, and rates could move into restrictive territory if needed to bring inflation under control.

Eurozone inflation reached 3.3% in August, and the ECB expects price pressures to increase further over the coming months. Kazaks warned that a narrowing output gap could strengthen the transmission of higher energy costs into consumer prices and wages, creating an additional upside risk to inflation.

The policymaker emphasized the eurozone's economic resilience but noted that consumers and businesses may become more sensitive to inflation if essential goods such as fuel and food become significantly more expensive. Kazaks did not specify whether he expects the ECB to raise rates at its October meeting, but said policymakers could continue tightening monetary policy in a gradual and measured manner.