European Central Bank policymakers are laying the groundwork for further monetary tightening, signaling that another rate increase could come as soon as October in response to escalating inflationary pressures. With price growth across the 21-nation eurozone rapidly approaching 4% and the economy outperforming expectations, decision-makers are building the case that interest rates must climb further.

Having already raised rates twice since the Iran conflict drove energy costs sharply higher, the ECB now holds the most hawkish stance among Group of Seven central banks. Data released Friday underscored the challenge: in August, household inflation expectations rose across all time horizons tracked by the central bank. While wage demands and other factors have yet to react significantly to surging oil and gas prices, officials are advocating for preemptive measures to prevent inflation from becoming entrenched.

Latvia's central bank governor Martins Kazaks delivered the clearest signal of higher borrowing costs ahead during a Friday interview in Dublin, where he joined several eurozone counterparts for an informal meeting of the region's finance officials. "The stronger the economy, the easier it is to raise rates," Kazaks said, adding that moving rates to a level that begins to restrain economic activity would be a "plausible outcome" if growth performs as expected. Croatia's Ante Zigman similarly argued that failing to curb price increases would jeopardize the economy. The eurozone expanded 0.6% in the second quarter, though that figure was partly boosted by volatile data from Ireland. Zigman noted there is "a lot of optimism" regarding growth. "We really need to focus on inflation, because inflation could eventually endanger economic growth as well."

On the inflation outlook, Estonia's Ulo Kaasik echoed ECB President Christine Lagarde's view that the knock-on effects of high energy costs have not yet materialized. This issue remains a key focus for the central bank, with some citing it as a reason for caution on further tightening. Lagarde emphasized at a Friday press conference that rising energy markets alone do not necessarily warrant higher rates. Kaasik, however, adopted a more hawkish tone. "We haven't seen the second-round effects yet," he said. "But our job is to make sure they don't appear."

Regarding the timing of the ECB's next move, officials remain tight-lipped. Another hike would push the deposit rate above its current 2.5%, into what is considered a restrictive territory for the economy. Both quarter-point increases so far were decided at quarterly policy meetings that also release fresh economic projections. The next such meeting is scheduled for December, which many view as the optimal moment for reassessment. Yet people familiar with the matter told Bloomberg earlier this month that an October action is also a viable option. Markets are divided on whether a hike will come next month, but have heavily priced in at least three more increases in the current cycle.

Ireland's Gabriel Makhlouf argued that the high level of uncertainty surrounding the Iran conflict and its impact on Europe means every meeting remains a live option. Kazaks expressed a similar view on Friday. When asked about the ECB's October 29 policy decision, Makhlouf stated: "Every meeting is possible. You can neither rule out nor rule in anything that might happen at future meetings."