ECB Raises Interest Rates Amid Disagreement Over Inflation Solution

The European Central Bank (ECB) is likely to raise interest rates again in September, but economists disagree on whether this will be enough to combat inflation.

Oil and gas prices have surged to 14.3% in August from 10.3% in July, driving eurozone inflation to its highest level since September 2023 at 3.3%. However, core inflation, which excludes energy and food, eased to 2.4% from 2.5%, suggesting that the increase is primarily a supply-side shock.

Economists argue that raising interest rates cannot directly solve the problem of high energy prices, as it would reduce consumption and investment without addressing the underlying cause of inflation. However, the ECB is concerned about second-round effects, where consumers demand higher wages due to persistently high fuel and electricity costs, potentially creating a feedback loop.

The ECB's policy dilemma becomes complicated when considering the nature of the inflation shock and the potential for broader domestic inflation. Some analysts, such as ING, argue that going beyond 2.50% would represent a significant change in monetary policy, indicating that policymakers believe genuinely restrictive policy is necessary.