The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the euro area. The ECB sets interest rates and manages monetary policy for the region. The ECB’s primary task is to maintain price stability, which means keeping inflation at around 2%. The basic tool to achieve this goal is to raise or lower interest rates. Relatively high interest rates usually result in a stronger euro and vice versa. The Governing Council of the ECB takes decisions on monetary policy at meetings held eight times a year. Decisions are made by the heads of the euro zone’s national banks and six enduring members, including ECB President Christine Lagarde.

In extreme situations, the European Central Bank may implement 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 lowering interest rates alone will not achieve the goal of price stability. The ECB used it during the Great Financial Crisis of 2009-11, in 2015 when inflation remained stubbornly low, and during the Covid pandemic.

Quantitative tightening (QT) is the inverse of QE. It is undertaken after quantitative easing, when economic recovery is underway and inflation begins to rise. While under QE the European Central Bank (ECB) buys government and corporate bonds from financial institutions to provide them with liquidity, under QT the ECB stops buying more bonds and stops reinvesting maturing capital into bonds it already owns. This is usually positive (or bullish) for the euro.