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The European Central bank has been criticized for its hesitant approach to monetary policy, with a study by the German Institute for Economic Research DIW suggesting that earlier interest rate hikes could have curbed Inflation in the Eurozone. The study, which was exclusively seen by Reuters, found that a gradual increase in key Interest rates from mid-2021 could have limited Inflation to a maximum of 3%, instead of the over 10% peak seen in August 2022.
According to the study, the ECB’s delayed response to rising Inflation, particularly in the aftermath of the Russian invasion of Ukraine, contributed to the spike in prices. The Central bank only ended its zero interest rate policy in July 2022, after which it implemented a series of rate hikes to address Inflation.
The study also highlighted the impact of monetary policy on energy prices, noting that higher key Interest rates could have dampened demand for energy in the Eurozone and caused the euro to appreciate against the dollar, thereby lowering energy prices.
While some ECB policymakers have acknowledged that rate hikes could have been implemented earlier, they argue that the bank eventually caught up with significant rate increases in the latter part of 2022 and into 2023, with 10 consecutive hikes raising the deposit rate to a record high of 4%.
The DIW study suggests that by raising Interest rates sooner, the ECB could have demonstrated a stronger commitment to fighting Inflation, potentially mitigating the sharp rise in prices following the Russian conflict. Despite Eurozone Inflation peaking at over 10%, similar surges were experienced in other developed economies, largely driven by imported energy prices.
The study attributes the ECB’s cautious approach to concerns about the economic situation in Eurozone countries post-COVID, as well as worries about financial sector stability. Overall, the institute estimates that if key Interest rates had been raised earlier, Eurozone GDP growth would have been lower initially but would have recovered by the end of 2023.
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Emma Collins, graduated in Financial Economics from the University of Chicago in the USA in 2016. She has since worked at an asset management firm in New York, where she specializes in investment strategies and portfolio management. Emma has a keen interest in financial analysis and has published several articles in renowned financial journals. Her work focuses on providing actionable insights to investors, and she is known for her forward-thinking approach to managing financial portfolios.
