Martins Kazaks, who is a Governing Council member of the European Central Bank and the governor of Latvijas Banka, indicated on September 14, 2026, that the argument for additional tightening of monetary policy is gaining traction. He suggested that interest rates might need to gradually reach restrictive levels to prevent rising energy costs from broadly impacting wages and prices. This comes after the ECB raised its key rate to 2.5% from 2.25% for the second time this year on the preceding Thursday, warning about persistent price pressures stemming from the Iran conflict.
Kazaks emphasized that the 2.50% deposit rate, which is considered the upper boundary of the neutral range that neither stimulates nor curbs economic growth, should not be viewed as a definitive ceiling. He explicitly stated, "Interest rates may need to wade into restrictive territory," and clarified, "There’s no unobservable threshold, or some higher bar to reach, for the rates to move above 2.50%." He declined to specify whether the next rate increase could occur as early as October but affirmed that the ECB has the capacity to implement gradual tightening without undue haste.
He further explained that the closing output gap in the euro area could facilitate a stronger pass-through of elevated energy costs to other prices and wages, which he identified as a clear upside risk to inflation. Kazaks noted that inflation, projected by the ECB to be 3.6% in the last quarter of this year and standing at 3.3% in August, is currently in an "inattention area" for households and businesses. However, he cautioned that this could change if frequently purchased items such as food and fuel continue to become more expensive, especially if inflation surpasses wage growth. Conversely, ECB Vice President Boris Vujcic on September 18, 2026, expressed that market expectations for further rate hikes are primarily driven by energy prices, while policymakers will consider a broader set of economic indicators.
