Rising interest rates: a safeguard against rising energy prices
Energy is a tricky sector for monetary policy, due to its potential impact on the overall price structure and on expectations
The European Central Bank has raised interest rates, bringing the deposit rate to 2.50 per cent – a level last seen on 23 April 2025, when inflation trends suggested that prices were set to ease gradually.
Risks associated with energy prices
Today, the situation is somewhat different. Driven by energy – a tricky sector for monetary policy due to the potential knock-on effects on the entire price structure and on expectations – headline inflation has risen to 3.3 per cent, its highest level since September 2023. Core inflation, in this case measured excluding energy and unprocessed food, continues, however, to fluctuate around 2.1–2.2 per cent, which is close to the average for the last twelve months.
Effects to be prevented
It is clear that the European Central Bank is primarily concerned about the potential knock-on effects – which must be prevented – of rising energy prices: indirect effects, pressure on short-term expectations, and second-round effects. At around 97.5, Brent crude prices are a long way from the high of 126.35 recorded at the end of April, but they have nonetheless risen significantly from the local low of 70.47 on 2 July.
Disinflation in the services sector
The case for maintaining a degree of caution on the price front – in what is, after all, a relatively calm situation – may perhaps be illustrated by a closer look at core inflation: its current trajectory is the result of two divergent trends. Services continue to undergo a long, gradual phase of disinflation.
In August, annual inflation was higher than half-yearly inflation (annualised using the seasonally adjusted index employed by the ECB, rather than Eurostat’s raw data), which in turn was higher than quarterly inflation (also annualised). This is a sign which – although intermittent in recent months – appears consistent with the recent gradual slowdown in prices in the sector.
