Iran conflict revives rate-hike talk but 2022 crisis shows fiscal tools worked better

Europe's benchmark gas price has nearly doubled since Israeli and US forces began striking Iranian targets on Friday. The surge has revived the debate that dominated 2022 and 2023: whether the European Central Bank should raise interest rates to guard against a fresh inflation spiral. On Monday, Markus Ferber, the European People's Party's economic spokesman in the European Parliament, warned that the conflict could trigger another energy crisis and urged the ECB to "stay vigilant." By Tuesday, Philip Lane, the bank's chief economist, told the Financial Times he saw "no reason to change the ECB's main interest rate" but promised to "closely monitor developments."

The last crisis was tamed by fiscal policy, not rate hikes

The recent exchange picks up almost exactly where the 2022-23 rate-hiking cycle left off. A review of that episode suggests the tools that actually contained inflation were fiscal, not monetary. Governments deployed tax cuts, direct subsidies to households and businesses, and mandatory gas storage targets. The ECB raised its deposit rate by 4.5 percentage points between July 2022 and September 2023, but monetary policy operates with a 12 to 18 month lag. By the time those increases fed through to the real economy, the acute phase of the energy shock had largely passed.

The ECB's own modelling put the cumulative disinflationary effect of the hikes at 1.2 percentage points in 2023 and 1.8 points in 2024, at the cost of roughly 1.5 percentage points of GDP growth per year over the three-year horizon. Yet the bank's modellers projected an "astonishingly wide" range of real-world outcomes, a spread that economic historian Adam Tooze described at the time as "essentially an admission of ignorance." The difficulty of pinning down causal relations in macroeconomic models means estimates of monetary policy's impact vary wildly.

Japan's experience casts further doubt on the rate-hike thesis

If higher rates were decisive, inflation trajectories should have diverged between economies that tightened aggressively and those that did not. They did not. Japan maintained a negative policy rate from 2016 until 2024, yet its inflation path during the energy crisis broadly tracked those of the euro area and the United States. That parallel movement undermines the claim that rate increases were the primary driver of disinflation. As Fabio Panetta, governor of the Bank of Italy, put it in 2023: the ECB "cannot do much against inflation triggered by a supply shock," because monetary policy only influences domestic demand.

Corporate profits, not wages, drove the inflation surge

The most striking omission from the current debate is the role of corporate profiteering. In 2022, oil and gas majors including Shell and Exxon recorded their highest-ever profits. Christine Lagarde acknowledged in 2023 that corporate profits "contributed around two-thirds to domestic inflation," more than twice the usual contribution. The result was a "large real-wage decline" even though monetary policy was explicitly designed to guard against a wage-price spiral, a spiral the OECD later confirmed never materialised. "The contribution of profits to inflation has gone a little bit missing," Lagarde told the European Parliament, noting the lack of systematic profit data comparable to wage indicators.

Isabella Weber, professor at the University of Massachusetts Amherst, calls the phenomenon "sellers' inflation." In a recent paper with Gregor Semieniuk, she found that US fossil fuel companies captured the largest gains from the 2022 crisis and that those profits "almost exclusively benefited the top wealth owners." Speaking at the Heinrich Böll Stiftung in 2023, Weber described the crisis as a "perverse window of opportunity" for firms to raise prices above cost increases without customers noticing. On Tuesday, she noted on social media that fossil fuel stocks are once again "exploding" in response to the war in Iran. Yet Ferber's Monday statement identified "wage setting" as a "key risk" and made no mention of corporate margins.

Rate hikes slowed the green transition and raised its cost

The 2022-23 tightening cycle carried a further, less discussed cost: it made the energy transition more expensive. Renewables require heavy upfront capital and are therefore acutely sensitive to the cost of borrowing. In the Netherlands, analysts estimated that higher interest rates added tens of billions of euros in additional costs across eight major climate technologies, solar, wind, geothermal and others, by 2030, and over €200 billion to 2050. Carsten Brzeski, chief economist at ING Germany, warned in 2023 that raising rates "poses a long-term risk for the energy transition because we know that under these circumstances, investments will simply not be made."

A year later, Mads Nipper, then chief executive of Ørsted, said continued elevated rates were "disproportionately hurting renewables, which require more upfront payment, especially offshore wind, slowing renewable deployment." The International Energy Agency calculated that solar and wind capacity added between 2021 and 2023 shaved €100 billion off European consumer power bills during the crisis, effectively stabilising prices. Yet the Institute for Climate Economics' annual State of Europe Climate Investment report found that after years of strong growth, green investment plateaued after 2023. Higher rates were not the only cause, but they were a material one.

Europe enters this shock with depleted gas buffers

The fiscal tools that worked last time have also been weakened. The European Commission set mandatory gas storage targets after the 2022 crisis, but as prices fell, member states including France and Germany eased the rules. Consequently, Europe enters the Iran crisis with significantly lower buffers. Storage stood at 46 billion cubic metres at the end of February 2026, down from 60 bcm a year earlier and 77 bcm in 2024. That depletion reduces the cushion against further supply disruption and increases the likelihood of price volatility feeding through to households and firms.

Alternatives exist but require political will

Economists have long argued that the ECB could shield green investments from higher borrowing costs if rates do rise. A 2024 paper by Weber and Jens van 't Klooster for the European Parliament's economy committee proposed targeted lending facilities and public price monitoring as less costly alternatives to blanket tightening. Joseph Stiglitz, speaking to EUobserver in 2023, said the focus should be on "facilitating the entry of new clean-energy firms, not making it harder for them to compete with entrenched fossil-fuel companies by increasing borrowing costs." The International Energy Agency estimates that clean energy investment could save $12 trillion (€10.4 trillion) in global fuel costs by 2050, slashing overall energy bills and stabilising prices for decades.

Such measures are politically contentious because they risk the ECB being seen to "pick winners." Yet the alternative, repeating a rate-hike cycle that arrives too late, hits the transition hardest, and ignores the profit channel that drove two-thirds of the last inflation surge, looks no less political. As Pauline Heinrichs, a war studies lecturer at King's College London, noted in a webinar on Monday, energy shocks are "bound to keep occurring as long as Europe depends on imported fossil fuels."