ECB's Knot: Central bank should keep open mind on next rate cut
The European Central Bank (ECB) Governing Council member Klaas Knot said on Saturday that the ECB should keep its options open regarding future interest rate moves, per Reuters.
Key quotes
"It is important that we keep all options open. Retaining full optionality would act as a hedge against the materialization of risks in either direction to the growth and inflation outlook.”
"We believe that our meeting-by-meeting and data-dependent approach has served us well.”
"We will have to see whether that was a little bit over-enthusiastic or not. We will only know once we do our own calculations again in December.”
"On the one hand, policy restriction may be reduced more quickly if incoming data indicates a sustained acceleration in the speed of disinflation or a material shortfall in the economic recovery.”
Market reaction
At the time of press, the EUR/USD pair was up 0.01% on the day at 1.0795.
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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