ECB's Villeroy: There is still scope for further policy easing, the extent is up for debate

Lallalit Srijandorn FXStreet

Member of the European Central Bank (ECB) Governing Council and Bank of France Governor François Villeroy de Galhau said late Tuesday that there is still room to lower interest rates further, and the 2.5% deposit rate could fall to 2% by the end of the summer, per Reuters.

Key quotes

I believe there is still scope for further easing. However, the pace and extent remain open.

Seen from today, markets expect an ECB interest rate of around 2% in the summer.

It is a possible scenario, considering that summer in Europe lasts from June till September.

All other things being equal, this rise in long term yields means a tightening of financial conditions, which we have to incorporate in our monetary assessment.

Market reaction

At the time of press, the EUR/USD pair was up 0.18% on the day at 1.0787.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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