ECB’s Rehn: Higher energy prices bring us closer to ECB’s adverse scenario for inflation
European Central Bank (ECB) official and Finnish Central Bank Governor Olli Rehn said during the European trading session on Friday that elevated energy prices bring us closer to the central bank’s adverse scenario for inflation.
Additional remarks
ECB projections subject to very high, pervasive uncertainty.
Rise in long-term interest rates will slow growth and reduce the pass-through of energy shock to prices, wages.
One uncertainty is possibility of a sudden reversal in market sentiment towards AI.
Market reaction
There is a further increase in the Euro (EUR) against the US Dollar (USD) during the release of ECB Rehn's comments. However, this appears to be the outcome of an extended correction in the US Dollar. As of writing, EUR/USD is up 0.21% to near 1.1265.
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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