By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Ulo Kaasik said Friday that it was “understandable” that financial markets expected further ECB rate hikes, pointing to significant upside risks to the inflation outlook.

In a blog post published on the website of Eesti Pank, which he heads, Kaasik said August headline inflation had benefited from weaker-than-expected food price growth.

“At the same time, developments in energy markets in recent weeks suggest that the risk of further inflation acceleration remains high,” he said.

Kaasik highlighted the recent rise in oil and gas prices, describing the increase in the latter as “even more worrying,” although he noted that current gas price levels remained significantly below those seen during the 2021-22 energy crisis.

The slower increase in food prices could also prove temporary, he said, with the risk of renewed acceleration remaining.

On economic activity, Kaasik said several indicators, including confidence and credit growth, pointed to continued solid growth.

“However, some setbacks can be expected in the third quarter data, as this summer’s heat wave had a negative impact, causing transport on the Rhine to be disrupted in places, electricity generation had to be reduced due to a lack of cooling water, agricultural production was damaged, etc.,” he said.

According to Kaasik, the risk that inflation would turn out higher than projected in the ECB’s baseline remained elevated, particularly given market expectations that the rise in gas and oil prices would be larger and more persistent than assumed in the ECB’s projections.

“Assessing the latest developments, it is understandable why financial markets expect further interest rate hikes from the European Central Bank to ensure that inflation returns to the 2% target within a few years,” he said, adding that the situation remained “still extremely uncertain.”