European Central Bank (ECB) policymaker Francois Villeroy de Galhau said on Tuesday that they have “significant leeway” to lower rates before exiting the restrictive policy, per Reuters.
Key takeaways
“We are monitoring actual inflation data, in particular for services, but monthly figures will be volatile due to base effects on energy.”
“This noise is not very meaningful, and hence we are still more outlook-driven and will look still more closely at the inflation forecasts.”
“We remain confident that barring an external shock, we will bring inflation to 2% target by next year, we will reach it with a soft rather than hard landing.”
Market reaction
These comments don’t seem to be having a significant impact on the Euro’s valuation. At the time of press, the EUR/USD pair was virtually unchanged on the day at 1.0763.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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