ECB's Lane: Shifts in risk distribution matter for rate decisions
European Central Bank (ECB) Chief Economist Philip Lane said on Monday that they will remain attentive to shifts in the risk distribution when taking interest rate decisions, per Reuters.
"An increase in the likelihood or intensity of downside risk factors would strengthen the case that a slightly-lower policy rate might better protect the medium-term inflation target," Lane explained while speaking at an event in Frankfurt.
Key takeaways
"While recent trade agreements have reduced uncertainty somewhat, the overall impact of the change in the global policy environment will only become clear over time."
"A persistent movement in the Euro on average has a multi-year impact on economic activity and inflation."
"These effects will be larger than the average if Euro appreciation is more due to external factors."
Market reaction
These comments received a neutral score of 5.2 from FXStreet ECB Speech Tracker. Meanwhile, EUR/USD stays under heavy bearish pressure and was last seen trading at 1.1660, losing 0.7% on the day.
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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