By Marta Vilar – SOFIA (Econostream) – European Central Bank Governing Council member Dimitar Radev said on Tuesday that further interest rate increases may be necessary if inflationary pressures prove persistent, warning that policymakers should not wait for second-round effects from the energy shock to fully materialize before considering action.

“If inflationary pressures persist, we may need to raise interest rates further,” Radev, who heads the Bulgarian National Bank, said in a speech at the OMFIF Sofia Forum in the Bulgarian capital.

“This is not a commitment for a specific decision,” he added, stressing that decisions would continue to depend on incoming data, including the inflation outlook, underlying inflation dynamics and the transmission of monetary policy.

Radev described the ECB’s decision to leave interest rates unchanged in October, following September’s increase, as “appropriate”, but cautioned against interpreting the pause as a sign that the tightening cycle had ended.

“The October pause gave us the chance to assess the data” and did not mean that “monetary policy has finished,” he said.

Inflation prospects had deteriorated since September, Radev said, pointing to the rise in euro area annual inflation to 3.8% that month, driven by a larger-than-expected increase in energy prices.

This raised the risk of inflation remaining above the ECB’s 2% target for longer than previously anticipated, he said.

While underlying inflation remained stable and there was little evidence so far of the energy shock feeding through into wages, Radev warned that the absence of significant second-round effects did not eliminate the risks.

“We should not wait for second-round effects to be full-fledged before we plan some action,” he said.

Radev pointed to the ECB’s latest Survey of Professional Forecasters, which showed inflation expectations rising to 2.8% and underlying inflation projections at 2.5%. Long-term inflation expectations, however, remained anchored at 2%, something he described as critically important.

At the same time, Radev acknowledged that higher energy prices were weakening consumer confidence, while rising bond yields and restrictive bank lending could weigh on economic activity and potentially dampen inflation.

“Our decisions should be based on data,” he said, warning against assuming that the current level of interest rates would remain sufficient if inflationary pressures persisted.

Revisions to the 2027 outlook suggested that the impact of the energy shock could prove more persistent than previously expected, reinforcing the need to monitor potential spillovers into prices, wages and inflation expectations, he said.

At the same time, Radev acknowledged that higher energy prices, weaker consumer confidence, rising bond yields and restrictive bank lending could weigh on economic activity and potentially affect inflation.

The ECB’s December meeting would provide updated economic projections and additional data, allowing policymakers to better assess the persistence of inflationary pressures and the risk of their transmission to wages and prices, he said.

However, Radev cautioned against assuming that the current level of interest rates would necessarily remain sufficient if inflation pressures persisted.

“Decision making based on data does not mean being passive,” he said. “It means that we need to react when data gives us the grounds to act.”

Radev also stressed the importance of sound fiscal policies, saying measures designed to cushion the energy shock should be timely and carefully targeted.

Uncertainty surrounding public finances or changes to business regulations could undermine confidence, discourage investment and further tighten financing conditions, with consequences for growth and the transmission of monetary policy, he warned.