Sources suggest ECB policymakers lean toward rate hold as tariff risks cloud outlook
Sources revealed that European Central Bank (ECB) policymakers expect to keep rates unchanged, unless they see a deterioration in growth and inflation resumes its downward path, as two sources told Reuters.
The ECB maintained unchanged rates, after easing policy eight times in a row. The ECB acknowledged that uncertainty about tariffs keeps policymakers on their toes, and sources mentioned that although a deal is reached, the ECB would not react immediately to the news.
Sources added that the ECB’s Governing Council needs to see inflation and growth edging down to reduce interest rates.
“The sources said that policymakers mostly agreed on how the economy would behave in the ECB's baseline scenario, in which the U.S. administration imposes a 10% tariff rate on European Union imports.”
Nevertheless, a discussion emerged on whether tariffs should be higher, with hawks favoring higher rates. At the same time, doves saw the risks of an economic slowdown increasing, which indicated that rates should be reduced.
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.
Recommended Articles
