ECB's Kazaks sees growing case for more tightening

European Central Bank policymaker Martins Kazaks indicated on Thursday that the case for further interest rate hikes is strengthening, suggesting that rates may need to move into restrictive territory beyond the current 2.5% level. Kazaks, who is also Latvia's central bank governor, told Reuters that while the ECB could move "stepwise" and "without rush," elevated energy prices and broader inflation, exacerbated by potential conflict-driven fuel cost increases, pose an upside risk to inflation.

He noted that the euro zone's economy is operating at capacity, which could facilitate the pass-through of higher fuel costs to wages and other prices. Euro zone inflation was 3.3% in August and is expected to rise in the coming months. The ECB has described the current 2.5% rate as the upper end of a neutral range, but Kazaks stated it should not be seen as a ceiling.

The ECB raised its key rate to 2.5% from 2.25% on Thursday, its second hike this year, and warned that price pressures from the Iran conflict could be lasting. Negotiated wages in the euro zone increased by 2.44% in the three months to June, a slight decrease from the 2.56% rise in the first quarter.