ECB's Šimkus: 25 bps rate cut needed in April
European Central Bank (ECB) Governing Council member Gediminas Šimkus said on Tuesday that a“25 basis points (bps) rate cut is needed in April.”
Further comments
- US tariff announcement warrants more accomodative monetary policy.
- We need to move to a less restrictive policy stance.
- Worsening of trade tensions can be deflationary in the medium term.
- Policy is currently still more restrictive rather than neutral.
- Even with another cut, will still only be at the upper bound of neutral interval.
- US tariffs announcement much more disappointing that anticipated.
- Undershooting risk already up before April 2, must carefully monitor.
- In the medium term, undershooting or being at target is more probable than overshooting.
- In June, let's see what has changed since April, then decide whether to cut again.
- I see no need to talk about 50 bps. That would be too much. We are not behind the curve.
Separately, ECB Vice President Luis de Guindos said that "we are in a moment of anxiety and uncertainty."
Market reaction
Following these comments, the EUR/USD pair is extending its pullback to near 1.0900, trading modestly flat on the day.
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
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
