The European Central Bank (ECB) Governing Council member and President of De Nederlandsche Bank (DNB), Klaas Knot, said on late Monday that Eurozone inflation is easing towards the 2% target, and geopolitical tensions pose minor threats, but the ECB should still exercise caution when cutting interest rates beyond a first step in June, per Reuters.
Key quotes
“I am increasingly confident in the disinflation process.”
“Eurozone inflation is falling towards 2%.”
“Geopolitical stress poses only moderate risks.”
“June rate cut remains realistic if price and wage data continue to come in line with projections.”
“After June, I would say: no pre-commitment to any specific time path.”
“We will have to take a cautious approach after June.”
“Every quarter, we will have an additional data point on the labor market going into a fresh round of projections and that will be an important piece of information for us to recalibrate our policy settings.”
“The experience of the US in the last three months has reminded us that we should still be vigilant.”
“It may well be only in the course of 2025 that this condition can be established.”
Market reaction
These comments have little to no market reaction to the Euro. The EUR/USD pair is trading at 1.0717, losing 0.03% on the day.
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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