ECB’s Panetta: Reduced room to cut rates further, but macro outlook remains weak
European Central Bank (ECB) executive board member Fabio Panetta said on Friday that there is a “reduced room to cut rates further, but the macro outlook remains weak and trade tensions could worsen it.”
Further comments
Future rate decisions need to be assessed on case-by-case basis, weighing data, inflation and growth outlook.
Essential to maintain pragmatic and flexible approach, closely monitor liquidity conditions.
Disinflation has not taken too high a toll on the Eurozone economy and is now close to completion.
Outcome of trade negotiations uncertain but impact on European economy bound to be significant.
Sectors most exposed to tariffs already showing signs of falling confidence, weaker expectations on orders and employment.
Market reaction
EUR/USD was last seen changing hands at 1.1345, down 0.21% on the day, little moved by these comments.
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.