By David Barwick – FRANKFURT (Econostream) – The case for further European Central Bank tightening is growing, and interest rates may need to move gradually into restrictive territory before higher energy costs spread more broadly to wages and prices, Governing Council member Mārtiņš Kazāks told Reuters.

“The case is building up for more tightening,” Kazāks, who is also governor of Latvijas Banka, said in an interview published Monday.

The ECB’s 2.50% deposit rate should not be regarded as a ceiling simply because it is at the upper end of estimates of neutral territory, Kazāks said.

“Interest rates may need to wade into restrictive territory,” he said. “There’s no unobservable threshold, or some higher bar to reach, for the rates to move above 2.50%.”

Kazāks declined to say whether the next increase could come as soon as October, but said the ECB had scope to tighten gradually and without rushing.

“If we move stepwise, we’ll be well-positioned,” he said. “Thanks to past decisions that have proven appropriate, so far we can afford to act without rush or jumpiness.”

The closing euro area output gap could make it easier for elevated energy costs to pass through to other prices and wages, Kazāks said.

“The output gap is closing, which means that pass-through to prices and wages may strengthen,” he said. “That is clearly an upside risk to inflation.”

Kazāks said inflation remained in what he called the “inattention area” for households and businesses, but warned that this could change if frequently purchased items such as food and fuel became still more expensive.

“Those are largely everyday purchase items, which may increase sensitivity to inflation, more so if inflation exceeds wage growth,” he said.