Madis Muller, the decision maker of the European Central Bank (EBC), explained on Friday that their decision to reduce key rates by 25 base points at the April political meeting was supported by a decrease in energy prices and tariffs.
Muller also added that politics indicators are no longer a limitation of the eurozone’s economic activity, adding that the key EBC indicators are heading in the right direction. Finally, he argued that a more crushed world economy could raise prices.
Market reaction
EUR/USD did not show an immediate response to these comments and recently it was seen that trade was practically unchanged on 1.1368.
EBC FAQ
The European Central Bank (EBC) in Frankfurt, Germany is a bank reserve bank. EBC establishes interest rates and manages monetary policy for the region. The basic mandate of the ECB is to maintain price stability, which means maintaining inflation at about 2%. Its main tool to achieve this is to escalate or reduce interest rates. Relatively high interest rates usually cause a stronger euro and vice versa. The ECB Managing Council makes decisions regarding monetary policy at meetings taking place eight times a year. Decisions are made by the heads of national banks of the euro area and six constant members, including the President of EBC, Christine Lagarde.
In extreme situations, the European Central Bank may protect the political tool called quantitative fox. QE is a process in which ECB prints the euro and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually causes a weaker euro. QE is a last resort when just lowering interest rates is unlikely to achieve the goal of price stability. EBC used it during the great financial crisis in 2009–2011, in 2015, when inflation remained stubborn low, as well as during Covid pandemic.
Quantitative tightening (QT) is the reverse of QE. This is undertaken after QE when economic recovery is underway and inflation begins to grow. While in QE, the European Central Bank (EBC) buys government and corporate bonds from financial institutions to ensure them liquidity, in QT EBC it stops buying more bonds and stops reinvesting the main maturation in the bonds it already has. It is usually positive (or stubborn) for the euro.
