ECB's Schnabel: June rate cut may be appropriate, path after is much more uncertain
European Central Bank (ECB) Board member Isabel Schnabel said on Friday that the central bank may cut interest rates in June, but policymakers should look very carefully at the data because there is a risk of easing prematurely, per Reuters.
Key quotes
“Says depending on incoming data rate cut in June may be appropriate but a path beyond June is much more uncertain.”
“Recent data have confirmed that the last mile of disinflation is most difficult.”
“Based on current data, a rate cut in July does not seem warranted.”
“With inflation risks still being tilted to the upside, front-loading of easing process would come with a risk of easing prematurely.”
“We cannot pre-commit to any particular rate path due to very high uncertainty.”
“It's virtually impossible to quantify a change in the natural rate of interest in real-time with any reasonable degree of precision.”
“The closer we get to a potentially neutral level, and this could be well above 2%, we need to move even more cautiously.”
“2% target has served us well, a change in the target is not appropriate.”
“Geopolitical shocks are a key risk that we need to watch, and this poses upside risks to the inflation outlook.”
“Over the longer run, geopolitical fragmentation would pose further upside risks to inflation by reducing the efficiency and reliability of global supply chains.”
Market reaction
These comments have little to no market reaction to the Euro. The EUR/USD pair is trading at 1.0861, losing 0.06% 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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