ECB Says Energy-Driven Inflation Justifies Interest Rate Hike

The European Central Bank's (ECB) decision to raise interest rates in June has been justified by research showing that the recent spike in inflation is largely driven by higher energy prices.

A new blog post from ECB researchers compared the current bout of high inflation with the one following Russia's invasion of Ukraine in 2022, using variables such as pandemic-related demand and supply imbalances, adverse energy supply shocks, as well as fiscal and monetary policy measures.

The research found that the current increase in headline inflation has been driven almost entirely by adverse energy supply shocks until the end of May 2026. In contrast, the 2021-22 bout of high inflation was also driven by monetary stimulus at first and fiscal stimulus later on.

The ECB's response to the current inflationary pressures is consistent with its medium-term orientation and financial market expectations, according to the research. Most economists had expected the war in Iran to end over the course of the summer.