The European Central Bank (ECB) Governing Council member and the Estonian central bank chief, Madis Muller, said that the ECB mustn’t rush into further interest rate cuts after a likely first step in June.
Key quotes
“We should be careful not to move too quickly with the loosening of monetary policy and wait until the data gives us the necessary confidence that inflation is getting sustainably back to the target.”
“As long as economic developments are in line with our expectations, it is reasonable to expect a few more rate cuts after June by the end of the year.”
“But when and how many will depend on how the economic situation develops as we go along.”
Market reaction
These comments have little to no market reaction to the Euro. The EUR/USD pair is trading at 1.0655, unchanged for the day.
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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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