ECB's Wunsch: The central Bank can cut interest rates before wages inflation falls to 3%
European Central Bank (ECB) Governing Council member Pierre Wunsch spoke at a news conference on the Belgian national bank's annual report, stating that the ECB will have to make decisions soon with interest rate cuts, even while wage inflation and price rises for services remain high.
Key quotes
"We are going to have to make a bet at some point,"
"Felt the Bank should act "before so long", without specifying a month."
"But it will remain a cautious move on the basis of what I know today because of the problem that has been commented on again and again and again that service inflation and wage developments are still running at levels that are ultimately not compatible with our objective.”
"But of course in our projections we have these going down so we are not going to wait until we see wage development at 3% before we cut rates. I guess we'll do it before and that's why I say it's important we need to take a bet,"
Market reaction
At the time of writing, the EUR/USD pair is trading higher at 1.0927, gaining 0.01% on the day.
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.
