ECB sees two rate hikes if Brent stays above $100 – Reuters
Sources speaking with Reuters revealed that the European Central Bank (ECB) policymakers are likely to hike rates “at least” twice this year, beginning in June if there’s no resolution to the Iran conflict.
The ECB kept rates unchanged at its April meeting, while signaling that discussions are underway to tighten policy to contain surging energy prices.
Sources speaking anonymously said, “They expected a first rate increase in June if the situation continued as it was, with traffic disrupted and spot Brent prices above $100 a barrel.”
During her press conference, Lagarde said there were lengthy discussions about a rate hike, but a source familiar with the matter said policymakers are eyeing a move in June, not April.
Another source revealed that rate increases are contingent on the outcome of the US-Iran conflict, and a possible de-escalation could trigger a fall in oil prices, which could improve the Eurozone’s economic 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
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
