ECB Raises Rates, but Can They Tame Energy-Driven Inflation?

The European Central Bank (ECB) raised its key interest rate by 0.25% to 2.5%, but it's unclear whether this move will be enough to combat inflation driven by energy costs.

Brent crude prices have climbed back above $100 a barrel, while the Dutch TTF benchmark for gas has surged by 190% since the start of the year, driving up inflation in the Eurozone to 3.3% in August from 2.9% in July.

ECB President Christine Lagarde described the decision as a 'no-brainer', but acknowledged that interest rates cannot produce barrels of oil or cubic meters of gas, and can only cool demand at home to prevent an imported price shock from turning into a domestic one.

The ECB is responding to what it fears will happen next, rather than what has already happened. While core inflation edged down in August, services inflation eased to 3.0% from 3.3%, and wages do not show a material response to the energy shock at this stage.