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The ECB’s Interest-Rate Balancing Act

As monetary policymakers seek to tackle record-high eurozone inflation, they should not forget that financial stability and a faster green transition are crucial to price stability. Cutting green investments in order to push down prices in the short run will make the economy more vulnerable to climate-related shocks.

BRUSSELS – Since 2008, the European Central Bank has learned important and costly lessons concerning the economic preconditions of price stability. Two of the most important requirements are financial stability and a faster green transition. Policymakers should not forget these lessons as they seek to tackle record-high eurozone inflation.

The main reason for the surge in inflation is high energy prices, which are up 36% year on year. In addition, food prices have increased dramatically as poor harvests, wars, and commodity speculation followed the pandemic-induced supply-chain disruptions of 2020-21. Even parts of the services sector are now reporting inflation well above the ECB’s 2% target. Meanwhile, corporate profits are soaring.

This turn of events is ironic, given that the ECB last summer concluded a two-year strategy review that was concerned mostly with the problem of low inflation. But, while the ECB is set to raise interest rates at its next meeting in July, it must not ditch its new strategy.

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