ECB's Rehn: Downside risks have materialised since March rate meeting
European Central Bank (ECB) policymaker Olli Rehn said on Wednesday that the case for continuing rate cuts at the April meeting is supported by downside risks materializing, per Reuters.
Key takeaways
"Tariff increases and increased uncertainty are already having adverse effects on economic growth in the Euro area and Finland in the short term."
"Inflation appears to be stabilizing at target and growth outlook has further weakened as a result of trade war."
"Large tariff increases will boost inflation in the United States, but in the Eurozone the effects on inflation can be two-way: tariff increases increase price pressures; slower growth dampens them."
"Overall, however, the effects on Eurozone inflation are apparently modest."
Market reaction
These comments failed to trigger a noticeable reaction in EUR/USD. At the time of press, EUR/USD was up 0.67% on the day at 1.1030.
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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