ECB's Kazaks says it's worth looking at a bigger rate hike in July.

The European Central Bank should consider an initial increase in interest rates above the planned increase by a quarter point if there are signs that high inflation rates are fueling expectations, said Board of Governors member Martins Casax. 

"If we see negative news in terms of inflation expectations, then in my opinion a preliminary rate hike would be a smart choice," Kazaks, head of Latvia's central bank, told Bloomberg Television in Sintra, Portugal. 

The ECB should monitor "what is happening in the labor market, what is happening with the consolidation of expectations - are expectations beginning to rise?" Kazaks said, declining to speculate on whether shifts in these factors could justify a half-point increase.

Money markets raised the tightening of rates after his remarks, placing a bet on 163 basis points of increase this year, compared with 158 basis points on Monday.

ECB officials are gathering for their annual retreat as concerns grow over the effects of next month's first rate hike in more than a decade. As borrowing costs rise, investors worry about a repeat of Europe's debt crisis, while threats of Russian power cuts fuel fears of an economic downturn.

Kazaks called the risk of recession "non-trivial" as rising prices eat up consumption. However, he said he believed the stakes could be raised "pretty quickly."

The ECB will get more information on the outlook for inflation later this week, and data for June released on Friday is expected to show a new all-time high. Price increases are now more than four times the ECB's target of 2%.

At the same time, the ECB is under pressure to announce a new instrument to prevent panic in public debt markets as it raises rates. At an emergency meeting this month, which followed the fall in Italian bond yields, he agreed to accelerate work on the crisis instrument.

President Christine Lagarde, who will speak at a conference on Tuesday, and several of her colleagues say the so-called anti-fragmentation tool is needed to protect efforts to curb inflation, though they have yet to reveal full details. 

Kazaks said it was important that fragmentation "does not interfere with the normalization of monetary policy." According to him, measures to compensate for the potentially stimulating effect of bond purchases can become part of a new tool.

"Sterilization can be an element," Kazax said. "My personal opinion is that it should be part of the tool."

Any new tool "should be a backstop" and only be used when urgently needed, he said.

Until the plan is unveiled, officials are seeking to smooth out potential market tensions by deploying reinvestments from the ECB's pandemic-era asset purchase program of 1.7 trillion euros ($1.8 trillion).