ECB Officials Signal Continued Rate Hikes Amid Rising Inflation Concerns

Martins Kazaks, a member of the European Central Bank’s (ECB) Governing Council and Governor of the Bank of Latvia, has emphasized that the ECB is not finished with raising interest rates. Following the recent increase of the deposit rate to 2.5%, Kazaks stated that the case for further monetary tightening is strengthening due to persistent inflation, which stood at 3.3% in August 2026, significantly above the ECB's target of 2%.

Kazaks suggested that the current rate should not be seen as a ceiling, hinting that rates may need to move into genuinely restrictive territory to effectively combat inflation. The primary driver of this inflationary pressure is rising energy costs, exacerbated by geopolitical tensions in the Middle East, particularly involving Iran. Kazaks warned of a potential feedback loop where businesses pass on rising costs to consumers, further embedding inflation in the economy.

His comments come shortly after the ECB's latest rate decision, with markets already anticipating another hike as early as October. Kazaks advocated for a cautious approach to tightening policy, contrasting the previous easing measures the ECB employed in 2025 to support a fragile recovery.

In a related development, Peter Kazimir, Governor of the National Bank of Slovakia and another ECB Governing Council member, has shifted focus to the surging prices of natural gas and electricity. In a recent blog post, Kazimir noted that natural gas prices are at four-year highs, with EU storage levels below historical norms, which could lead to significant increases in heating and electricity costs for European households.

Kazimir described the inflation risks as being “clearly tilted to the upside,” indicating a higher likelihood of inflation surprises in the coming quarters. The ECB raised its key policy rate to 2.5% during its September meeting, marking the second increase of 2026. Markets are pricing in a 60% chance of another hike at the October 29 meeting, which could raise the policy rate to 2.75%.

Both officials highlighted the broader implications of rising energy costs on food inflation and consumer purchasing power, as increased costs in energy and production are expected to trickle down to consumers, affecting their spending habits.