ECB policymakers open door to more rate hikes on energy risk

ECB May Raise Rates Further if Energy Price Surge Fuels Euro Zone Inflation

ECB Policymakers Signal Potential for Further Rate Increases Amid Energy Price Concerns

By Francesco Canepa and Balazs Koranyi

Central Bankers Respond to Energy Price Surge

FRANKFURT, Sept 11 (Reuters) - Two European Central Bank policymakers opened the door on Friday to further interest rate increases if a war-fuelled rise in energy prices continues and pushes up other prices in the euro zone.

The ECB raised borrowing costs on Thursday for the second time this year and sources told Reuters policymakers expect further policy tightening in the months ahead, with a move possible as early as October.

Dependence on Oil and Gas Price Developments

The central bankers of Germany and Estonia acknowledged this prospect on Friday although they both stressed any move would depend on how oil and gas prices develop.

Bundesbank President's Perspective

Bundesbank President Joachim Nagel said the ECB might need to raise rates to a level that mildly curbs the economy.

"I will not exclude that we have to go into the mild restrictive territory, but as I said, it's very much dependent on how the energy prices evolve, how the price picture is evolving over the course of maybe the next month," he told CNBC in an interview.

Current Rate Increase and Market Expectations

The euro zone central bank increased its key rate from 2.25% to 2.50%, bringing it to the upper end of its estimated neutral range, which neither stimulates nor slows down the economy.

Money markets have started pricing in at least another three ECB rate hikes over the next year.

Reactions from Other Central Bank Governors

Estonia's Central Bank Governor's View

Ülo Kaasik, Estonia's central bank governor, said such expectations were "understandable" given the latest increase in fuel prices and the risk that food would also become more expensive.

"Recent developments in energy markets, for example, indicate the possibility that the price increase for gas and fuels will be much larger and last longer than expected in the forecast," he said in a blog post.

Slovenia's Central Bank Governor's Warning

Slovenia's central bank governor Primož Dolenc also warned in a blog post about "rising energy and electricity costs in the autumn and winter months".

ECB's Updated Projections

The ECB on Thursday slightly increased its projections for growth and inflation but these did not capture the latest energy price moves.

(Reporting by Francesco Canepa; Editing by Sharon Singleton and Toby Chopra)