ECB’s Nagel: Central bank is in a good position to respond to surging energy prices
European Central Bank (ECB) Governing Council Member and President of the Deutsche Bundesbank, Joachim Nagel, said on Friday that the central bank is in a good position to respond to surging energy prices. Nagel added that ECB should not pre-commit to any policy moves before the September policy meeting.
Key quotes
Central bank well-positioned to track upcoming developments closely.
We are still facing intense uncertainty.
The rate hike in June already put us in a good position from which we can monitor further developments closely.
We are seeing in the Middle East that the situation remains highly fragile.
ECB should not pre-committ to any policy moves in the meantime.
Should instead analyse the heaps of incoming data between now and the next meeting in September.
Market reaction
At the time of writing, the EUR/USD pair is up 0.08% on the day to trade at 1.1381.
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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