ECB Accounts: Uncertainty calls for caution in policy-setting and in communication
The accounts of the European Central Bank's (ECB) March policy meeting showed on Thursday that likely shocks are on the horizon, including from escalating trade tensions, and uncertainty more generally, per Reuters.
Key takeaways
"These factors could increase the risk of undershooting the inflation target in the medium term."
"Being prudent in the face of uncertainty did not necessarily equate to being gradual in adjusting the interest rate."
"Uncertainty called for caution in policy-setting and especially in communication."
"Significant expansion of fiscal policy linked to defence had the potential to derail the disinflation process."
"The combination of us tariffs and retaliation measures could also pose upside risks to inflation."
"It was argued that it was no longer possible to be confident that monetary policy was restrictive."
Market reaction
EUR/USD preserves its strength and was last seen gaining more than 2% on the day at 1.1090.
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.