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And Yet They Move: Energy Prices Fall When Key Interest Rates Increase, Despite Countervailing Effects

DIW Weekly Report 8 / 2023, S. 73-80

Gökhan Ider, Alexander Kriwoluzky, Frederik Kurcz, Ben Schumann

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Energy prices have risen sharply as a result of the coronavirus pandemic as well as the Russian attack on Ukraine in February 2022. The resulting consumer price inflation is forcing the European Central Bank (ECB) to act in accordance with its mandate. However, the ECB expresses doubts that it will be able to have an impact on the price increases. As this Weekly Report based on an analysis of structural relationships in the euro area emphasizes, the ECB is anything but powerless in regard to energy price developments: Following a 2022 Weekly Report that showed that fuel and heating costs generally fall in the wake of an interest rate hike, this Weekly Report identifies three channels of monetary policy through energy prices. In some cases, they have countervailing effects. However, the conclusion is clear: The ECB can actually dampen energy prices by raising the key interest rates.

Frederik Kurcz

Ph.D. Student in the Macroeconomics Department

Ben Schumann

Ph.D. Student in the Macroeconomics Department

Gökhan Ider

Ph.D. Student in the Macroeconomics Department

Alexander Kriwoluzky

Head of Department in the Macroeconomics Department

JEL-Classification: E31;E52;Q43
Keywords: ECB monetary policy, energy prices, exchange rate channel

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