ECB’s Rehn: Outlook for growth and inflation remains highly uncertain

Sagar Dua FXStreet

European Central Bank (ECB) policymaker and Finnish central bank governor Olli Rehn said during European trading hours that the outlook for the Eurozone’s growth and inflation remains highly uncertain due to the trade war that has just begun, and geopolitical tensions.

Additional remarks

Our next policy move is not automatically an interest rate hike.

Future decisions are to be made on a meeting-by-meeting basis.

Inflation risks are now slightly tilted to the downside.

But not in favour of pre-emptive or "insurance" rate cuts at this stage.

Geopolitics now directly drives inflation, growth, and market volatility.

FX Implications

The impact of ECB Rehn’s comments seems insignificant on the Euro (EUR) as his comments look similar to what President Christine Lagarde said in his press conference on Thursday. As of writing, the EUR/USD pair trades 0.11% lower to near 1.1710.

ECB FAQs

What is the ECB and how does it influence the Euro?

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.

What is Quantitative Easing (QE) and how does it affect the Euro?

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.

What is Quantitative tightening (QT) and how does it affect the Euro?

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.

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