ECB’s Lane: Confidence in getting inflation lower is improving

The European Central Bank (ECB) Chief Economist Philip Lane said on Monday that the recent Eurozone economic data have made him more certain that inflation is returning to the ECB 2% target, boosting the possibility of a first interest-rate cut in June, per Bloomberg.

Key quotes

“Both the April flash estimate for euro area inflation and the Q1 GDP number that came out improve my confidence that inflation should return to target in a timely manner,” he was cited as saying. “So, as of today, my personal confidence level has improved compared with our April meeting. But of course, more data will arrive between now and June.”

“We should not exaggerate the impact,” he said. “The US economy and US interest rates affect the euro area in different ways, and essentially, these different mechanisms work in opposite directions.”

“It is a month-by-month assessment, but in the longer term we have to accept that we live in a world that is going to face a lot of geopolitical tensions over a number of years.”

Market reaction

These comments have little to no market reaction to the Euro. The EUR/USD pair is trading at 1.0763, adding 0.02% 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.

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