ECB officials agree: We need to act quickly to tame inflation
- EUR/JPY rises to near 0.15% on increasing hopes of an ECB interest rate hike in June.
- Several ECB officials warn of rising Eurozone inflationary pressures amid Hormuz closure.
- Investors await BoJ Ueda’s speech and the Tokyo CPI data for May.
The Euro (EUR) trades 0.15% higher to near 185.00 against the Japanese Yen (JPY) during the European trading session on Monday. The EUR/JPY pair trades higher on expectations that the European Central Bank (ECB) could raise interest rates in the near term, in an attempt to ensure that Eurozone inflationary pressures remain close to the 2% target.
A majority of ECB officials have warned of rising inflationary pressures in their latest commentaries and have stated that central bank would need to act quickly to tame price rises.
On Monday's European trading session, ECB governing council member and Governor of the Bank of Greece Yannis Stournaras said that the closure of the Strait of Hormuz, a critical passage to almost 20% of global energy supply, may have a secondary effect on wages and prices of goods and services. Stournaras added, “It's necessary to ensure the return of inflation to the medium-term target of 2%.”
Over the weekend, ECB member and head of the Austrian central bank, Martin Kocher, said at the sidelines of a May 22-23 meeting of European finance ministers in Cyprus that the central bank is heading for an interest-rate increase next month unless a sustainable peace deal between the United States (US) and Iran can be found, Bloomberg reported.
Kocher added that policymakers are effectively weighing the options of keeping rates unchanged and raising them at the June policy meeting. “Everything points to us deciding between holding and raising rates,” Kocher said.
Meanwhile, the Japanese Yen (JPY) trades lower, except its North American peers, with investors awaiting the Bank of Japan’s (BoJ) Governor Kazuo Ueda’s speech on Wednesday and the Tokyo Consumer Price Index (CPI) data for May, which will be released on Friday. Investors will pay close attention to both events to get fresh cues regarding the monetary policy outlook.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
