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

Author

Listed:
  • Gökhan Ider
  • Alexander Kriwoluzky
  • Frederik Kurcz
  • Ben Schumann

Abstract

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.

Suggested Citation

  • Gökhan Ider & Alexander Kriwoluzky & Frederik Kurcz & Ben Schumann, 2023. "And Yet They Move: Energy Prices Fall When Key Interest Rates Increase, Despite Countervailing Effects," DIW Weekly Report, DIW Berlin, German Institute for Economic Research, vol. 13(8), pages 73-80.
    • Handle: RePEc:diw:diwdwr:dwr13-8-1
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    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.867129.de/dwr-23-8-1.pdf
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    More about this item

    Keywords

    ECB monetary policy; energy prices; exchange rate channel;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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