By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Ülo Kaasik said Friday that financial markets were understandably expecting interest rates to rise again this year as renewed Middle East tensions kept inflation risks elevated.

“Given recent developments, it is understandable that financial markets expect the Governing Council to raise interest rates further this year in order to ensure that inflation remains around 2% a couple of years ahead,” the Eesti Pank president said in a blog post.

At the same time, the outlook was extremely difficult to predict, and decisions could be taken only on the basis of developments by the time they were made, Kaasik said.

Thursday’s decision to leave interest rates unchanged did not mean that uncertainty related to the Middle East war or the resulting upside risks to inflation had passed, he said.

“The events of the past month and a half have shown that the military conflict in the Middle East can quickly ease and flare up again, causing energy prices to move up and down like a roller coaster,” Kaasik said.

Euro area inflation slowed to 2.8% in June from 3.2% in May, mainly because of lower energy and food prices, he said.

Oil prices had fallen to around $70 a barrel following a temporary restoration of supplies from the Persian Gulf, but had risen above $90 by the time of Thursday’s meeting after the conflict escalated again, Kaasik said. European gas prices had also climbed above their early-June level.

“The Middle East war therefore remains the greatest risk preventing inflationary momentum from subsiding,” he said.

The euro area economy had nevertheless proved surprisingly resilient, while lending to businesses and households had continued to grow, Kaasik said.

Wage growth had slowed somewhat despite the strong labor market, while wages had generally continued to rise faster than consumer prices, supporting household purchasing power.

The longer the energy-driven inflation increase persisted, the greater the risk that it would spread more broadly to other prices, Kaasik said.