ECB's Rehn: Should avoid being overly optimistic about duration of Iran conflict
European Central Bank (ECB) official and Finnish Central Bank Governor Olli Rehn said during European trading hours on Thursday that the war between the United States (US), Iran, and Israel is expected to raise inflation in the near term.
Remarks
We shouldn't be overly optimistic about duration of Iran conflict.
We need to keep cool head and avoid hasty conclusions.
It is likely to raise inflation in short term.
This kind of conflict tends to dampen demand, leads to more subdued growth.
Market reaction
The comments from ECB's Rehn appear to be insignificant for the Euro (EUR) as they lack any cues on the monetary policy outlook. As of writing, EUR/USD trades marginally lower to near 1.1625 after cutting its early losses.
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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