Rising Rates? Companies with Floating-Rate Loans Raise Their Prices

In 2022, the European Central Bank (ECB) hiked rates aggressively. Within a few months, the deposit facility rate jumped from -0.5% to 4% in an effort to bring runaway inflation - above 10% in several Eurozone countries - back under control. Yet, in many sectors, prices remained surprisingly sticky. Why?

A potential answer comes from the paper Inflation and floating-rate loans: evidence from the euro area, authored by Fabrizio Core (Luiss), Filippo De Marco (Bocconi, in the photo), Tim Eisert (Nova School of Business and Economics), and Glenn Schepens (European Central Bank), and published in the ECB’s Working Paper Series. The study sheds light on a mechanism long overlooked in macroeconomic models: the transmission of monetary policy may stall when companies are exposed to floating-rate loans.

“Companies with floating-rate debt don’t cut prices after a rate hike,” explains Filippo De Marco, Associate Professor of Finance, “on the contrary, they may even increase them to offset the rise in debt costs.” A rational response - yet one that undermines the ECB’s core objective: cooling demand and therefore prices.

The core of the study

To reach this conclusion, the authors merged three massive datasets: AnaCredit (the European credit registry tracking all loans above €25,000), Eurostat’s sector-level inflation data (CPI), and - perhaps most revealing - scanner data on over 270,000 individual supermarket products sold in Italy, Germany, and France between 2020 and 2023. The finding? The impact of rate hikes on prices varies significantly depending on the structure of a firm’s loans. On average, a 1-percentage point increase in ECB interest rates causes a 0.51% price drop among companies with fixed-rate debt. But for companies with floating-rate loans, the price drop is just 0.23% - less than half.

A shelf-level example

Take yogurt, for example. If “Brand X” yogurt is produced by a firm with fixed-rate loans, its price is likely to fall when rates rise. But if “Brand Y” yogurt - identical in category and type - is made by a firm with floating-rate debt, its price might hold steady or even go up. The difference lies not in the product or consumer, but in the firm’s financial structure. “This isn’t just a statistical anomaly,” De Marco notes, “but a structural mechanism. If your funding costs suddenly rise and you have some market power, you raise prices to protect your cash flow.”

The Italian case

The phenomenon is particularly relevant for Italy, where around 60% of corporate loans are floating-rate. In contrast, most business lending in Germany and France is fixed-rate (over 70%). This divergence has big implications. The researchers estimate that if all euro-area firms had had the same exposure to fixed-rate loans as those in France, Germany, and Belgium, inflation in 2022–2023 would have been 0.8 percentage points lower. “That’s a difference that could have significantly sped up the return to the 2% inflation target,” De Marco comments.

When market power matters

The paper also shows that not all firms with floating-rate loans can raise prices. Only those with substantial “customer capital” - a loyal, price-insensitive consumer base - are able to pass on cost increases without losing market share. In more competitive markets, by contrast, companies cannot afford to hike prices without being immediately undercut by more aggressive rivals.

Side effects: renegotiations and margins

Another key insight concerns firms’ financial behavior. After rate hikes, companies with floating-rate loans were more likely to renegotiate their terms, seeking lower spreads or switching to fixed-rate contracts. But such adjustments happen after the fact - once higher interest payments are already hitting the bottom line. Moreover, while the operating margin (EBIT/sales) increased for floating-rate firms, their return on assets (ROA) did not - indicating that price hikes were used mainly to cover rising costs, not to boost profits. In other words: no “greedflation,” just financial survival.

Implications for central banks

The study’s message is clear: monetary policy is not neutral with respect to corporate debt structure. In a system where many firms borrow at floating rates, their short-term response to rising interest rates may actually fuel inflation instead of cooling it. To strengthen the transmission of monetary policy, one option is to encourage the uptake of fixed-rate debt. Another is to promote market competition: in truly competitive markets, even indebted firms can’t raise prices. “A more explicit focus on corporate loan structures should be on central banks’ radar,” De Marco concludes. “Because in a world where inflation is back, even the fine print of credit contracts matters.”