Gediminas Simkus, a member of the European Central Bank's Governing Council and the head of Lithuania's central bank, said the ECB may have to raise interest rates again as data indicate price pressures continue to build.
Simkus stated in an interview that September inflation figures came in above expectations, energy costs are higher than forecast, and the labor market remains quite strong.
Speaking during the International Monetary Fund (IMF) meetings in Bangkok, he said that while whether to raise rates by year-end will depend on more data, the possibility of action this month cannot be ruled out.
"Since September, we have gained more evidence that some degree of monetary tightening may be needed," Simkus said. "From a policymaker's perspective, you want to decide when you have the maximum amount of data, and the next such meeting is in December. But we also cannot ignore that we have another meeting in October."
To counter the energy price shock triggered by the Middle East war, the ECB has raised rates twice this year. Markets and economists expect further action, but they are divided on how high borrowing costs will go.
Belgian central bank Governor Pierre Wunsch said on Wednesday that "we may have to raise rates again," although uncertainty remains very high.
Simkus said that, so far, rising oil and gas costs have not produced clear second-round effects, consistent with earlier remarks by ECB President Christine Lagarde.
But he warned that "the longer energy prices stay high, the greater the probability of spillover."
Simkus said rising sovereign yields are a countervailing factor, but he also cautioned that he is not too worried about the euro area bond market, after France recently led a selloff.
"It is very important to distinguish between market fragmentation and a justified repricing of sovereign risk," he said. "I think the rise in French sovereign yields stems especially from economic developments, with the market pricing debt levels, political uncertainty and fiscal fundamentals."
Simkus noted that different countries facing different market borrowing costs is "normal to some extent."
"Not every rise in sovereign yields," he added, "should be interpreted as market fragmentation."
The ECB has an unused crisis-response tool, the Transmission Protection Instrument (TPI). Simkus suggested that, at least for now, there is no need to activate it.
"I believe things will be resolved," he said. "At present, I absolutely see no reason why the ECB would need to play a role."
Simkus also addressed the separate issue of the ECB's minimum reserve requirement. Currently, banks must hold 1% of certain liabilities, mainly customer deposits, in a non-interest-bearing special account at the central bank. Discussion about this requirement has been ongoing for some time. Raising the reserve requirement would allow euro area central banks to save on interest paid to banks, helping address losses caused by quantitative easing. He views this as a "structural part" of the monetary policy framework, not an "actively managed tool."
"We should not change reserve requirements based on economic and monetary conditions," Simkus said, while adding that "there is nothing wrong with discussing it" and that the current level is not "unchangeable."
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