ECB Governing Council member and head of the Lithuanian Central Bank, Gediminas Simkus, said during European trading hours on Monday that economic growth in the euro zone has improved, but remains sluggish, with inflation expected to remain near 2% in the medium term.
Market reaction
There appears to be no significant impact of the ECB’s Simcos comments on the Euro. The EUR/USD pair has been trading higher since the start of the European session, rising 0.2% to approach 1.1735 as of writing.
European Central Bank Frequently Asked Questions
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the euro area. The European Central Bank sets interest rates and manages monetary policy for the region. The ECB’s primary mandate is to maintain price stability, which means keeping inflation at around 2%. The primary tool for achieving this is raising or lowering interest rates. Relatively high interest rates usually lead to a stronger euro and vice versa. The ECB’s Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone’s national banks and the six permanent members, including the President of the European Central Bank, Christine Lagarde.
In extreme situations, the ECB can activate a policy tool called quantitative easing. Quantitative easing is the process by which the European Central Bank prints euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. Quantitative easing usually leads to a weaker euro. Quantitative easing is considered a last resort when simply lowering interest rates is unlikely to achieve the goal of price stability. The European Central Bank used it during the great financial crisis of 2009-2011, in 2015 when inflation remained stubbornly low, and also during the coronavirus pandemic.
Quantitative tightening (QT) is the opposite of quantitative easing. It is implemented after quantitative easing when the economic recovery is underway and inflation begins to rise. While in the QE program the European Central Bank (ECB) buys government bonds and corporate bonds from financial institutions to provide them with liquidity, in the QT program the ECB stops buying more bonds, and stops reinvesting the capital owed on the bonds it already holds. It is usually positive (or bullish) for the EUR.
