ECB’s Rehn: Monetary policy should not be based on oil prices alone
European Central Bank (ECB) official and Finnish Central Bank Governor Olli Rehn said during European trading hours on Wednesday that higher oil prices should be the only factor to direct monetary policy decisions. Rehn added that the central bank needs to assess the scope of energy shocks.
Additional comments
ECB needs to assess whether the energy shock spreads to inflation expectations, wages and core inflation.
It's worth preparing for a protracted conflict in the Strait of Hormuz.
If events turned out differently, it would be easier to adjust.
Key factors are the strength and duration of the energy shock and any broader pass-through into inflation.
The energy shock is not, at least so far, quite comparable to the 2022 shock.
The ECB is committed to keeping inflation stable around 2% over the medium term.
Market reaction
There seems to be no immediate impact of ECB Rehn's comments on the Euro (EUR); however, EUR/USD has recovered to near 1.1715 from the intraday low of 1.1695, at the press time, driven by a slight correction in the US Dollar (USD).
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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