The European Central Bank (ECB) can also battle rising energy prices by boosting interest rates, according to a DIW analysis.
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Experts believe that ECB interest rate rises can lower energy prices through a variety of routes, as the German Institute for Economic Research (DIW) revealed in Berlin on Wednesday. "The ultimate line is that the ECB can truly control energy costs by hiking key interest rates," said Alexander Kriwoluzky, director of DIW's Macroeconomics section. Energy costs have lately soared, owing mostly to Russia's actions against Ukraine last year. It was widely expected that the eurozone's central bank could do nothing to stem the rise in energy costs.
Kriwoluzky and colleagues investigated the structural consequences of ECB interest rate increases. According to the DIW, the researchers concluded in their model calculations that an increase in interest rates would reduce aggregate demand. Businesses invested less, and individual families slowed their consumption. "Although consumer prices fall by less than 0.1 percent as a result, energy prices fall more than fivefold," according to the DIW. The study indicates that the ECB has raised interest rates properly since the summer of 2022.
According to the study, while rising interest rates, numerous avenues of action, some of which function in opposite ways, must be addressed. Yet, the bottom line is that energy prices will reduce. Yet, the findings also revealed that raising interest rates slows the economy and raises unemployment. "As a result, the ECB's monetary policy has economic consequences," Kriwoluzky noted. At periods of high inflation, it is critical to monitor and capture inflation expectations so that inflation does not spiral out of control in the longer run. The European Central Bank is on the right track.