ECB’s cautious policy fuels eurozone inflation – DIW

The European Central Bank (ECB) exacerbated inflation in the eurozone through its cautious monetary policy, according to a study by the German Institute for Economic Research (DIW).

The research suggests that a gradual increase in key interest rates from mid-2021 could have limited inflation to a maximum of 3 per cent instead of the peak of over 10 per cent recorded in August 2022.

As inflation surged following Russia’s invasion of Ukraine, the ECB delayed raising rates, maintaining its zero interest rate policy until July 2022.

Ben Schumann, the study’s author, argues that the ECB’s claim that monetary policy couldn’t influence energy prices was flawed.

He contends that higher interest rates could have curtailed energy demand in the eurozone and led to a stronger euro against the dollar, further moderating energy prices.

While some ECB officials acknowledged that earlier rate hikes might have been beneficial, they pointed to the central bank’s rapid adjustments later, including several 75 basis point increases in late 2022.

The DIW study indicates that if interest rates had been raised sooner, eurozone GDP would have been approximately 3 percentage points lower but would have rebounded by the end of 2023.

Despite a peak inflation rate in the eurozone that was among the highest in developed economies, the study highlights Europe’s heavy reliance on imported energy as a primary driver of rising prices.