ECB’s Pereira: No second-round inflation effects at present
European Central Bank (ECB) official and Governor of the Bank of Portugal Santos Pereira said during the European trading session has ruled out fears of second-round inflation effects. Pereira advised that France should pursue fiscal prudence. Lately, French bonds witnessed massive sell-off amid heightened fiscal concerns.
Comments
Current inflation and core inflation levels are far below those seen during 2022 energy shock.
There are no second-round inflation effects at present.
Other goods prices show no signs of de-anchoring inflation expectations.
France must cut its deficit and debt, pursue reforms and fiscal prudence.
Market reaction
No responsive action is seen in the Euro (EUR), following remarks from ECB’s Pereira. As of writing, EUR/USD is down 0.62% to near 1.1190.
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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