ECB's Kazaks signals more rate hikes as euro inflation holds at 3.3%
In brief
- Kazaks signals more rate hikes ahead, stating 2.5% deposit rate is not a ceiling as inflation sits at 3.3%
- ECB raised rates in September for the second time this year, with markets pricing another hike by October
- Middle East geopolitical tensions keep energy prices elevated, fueling eurozone inflationary pressure
Rate Hikes Likely to Continue
The ECB raised its deposit rate to 2.5% in September, marking the central bank's second increase of the year. Kazaks argued that rates may need to push into genuinely restrictive territory to bring inflation back down. He advocated for a measured path toward tighter monetary policy rather than aggressive leaps, but the message was clear: the tightening cycle isn't finished.
Markets are already pricing in an increased likelihood of another hike as soon as October. The shift marks a sharp reversal from 2025, when the ECB spent much of the year in easing mode, cutting rates to support a fragile recovery.
Geopolitical Pressures Fueling Inflation
Energy remains a stubborn headwind. Ongoing geopolitical conflicts in the Middle East, particularly involving Iran, have kept energy prices elevated. The risk, Kazaks warned, is that when an economy runs close to full capacity, businesses pass rising costs on to consumers through higher prices — creating a feedback loop where energy inflation becomes embedded in wage demands and pricing behavior.
This dynamic is why the ECB can't afford to stay patient. Higher eurozone interest rates tend to strengthen the euro, as investors chase better yields on euro-denominated assets, but that currency strength alone won't solve the inflation problem if underlying cost pressures remain unanchored.
