Why the ECB can raise rates

Analysts seem to agree. At its September meeting, the European Central Bank will raise interest rates, bringing the deposit rate to 2.50%, the level abandoned on April 23, 2025, when inflation conditions suggested a gradual cooling of prices.

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Today the situation is a bit different. Driven by energy – a tricky sector for monetary policy due to possible repercussions on the entire price structure and expectations – overall inflation has returned to 3.3%, the highest since September 2023. Core inflation, in this case excluding energy and unprocessed food, however continues to fluctuate around 2.1-2.2%, close to the average of the last twelve months.

It is clear that the European Central Bank is mainly concerned about the possible repercussions – to be prevented – of energy price increases: indirect effects, short-term expectation tensions, second-round effects. Near 97.5, Brent prices are far from the highs of 126.35 at the end of April, but still mark a significant rise from the local low of 70.47 on July 2.

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The opportunity to maintain some caution on the price front – in a still relatively calm situation – may perhaps be shown by the detail of core inflation: its current evolution is the result of two divergent trends. Services continue a long and slow phase of disinflation.

In August, annual inflation was higher than semi-annual inflation (annualized using the seasonally adjusted index used by the ECB and not the raw Eurostat one), which in turn was higher than quarterly inflation (also annualized). This is a sign that – although intermittent in recent months – seems consistent with the recent progressive slowdown in sector prices.

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