Lagarde speech: Governing Council held debate on merits of rate hike

Key interest rates remain unchanged after the October policy meeting. European Central Bank (ECB) President Christine Lagarde outlines the reasons for the decision and takes questions from the press.

Policy highlights

"We have seen an increase in indirect effects from the energy price surge."

"We are not seeing a risk of second round effects in addition to what's in the projections."

"Cost of long-term financing clearly increased vs September."

"Governing Council debated whether a rate hike was appropriate."

"Based on uncertainty, unchanged underlying inflation, Governing Council decided unanimously to hold."

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"Measured approach remains appropriate at this point in time."

EUR/USD response

At the latest reading, EUR/USD was down 0.15% on the day at 1.1135, having edged up from its session lows after these comments.

Euro essentials

The Euro at a glance

20 European Union countries use the Euro as members of the Eurozone. Only the US Dollar is traded more heavily worldwide. The Euro represented 31% of all foreign exchange transactions in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world's most traded currency pair. Next are EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The ECB’s role in the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and directing monetary policy. Maintaining price stability is its core mandate, whether through containing inflation or supporting growth. Interest rate increases and cuts are its main policy instrument. Higher relative rates, or expectations of rate rises, generally support the Euro; the reverse also applies. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national banks and six permanent members, among them ECB President Christine Lagarde.

Inflation and the Euro’s value

Measured by the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic gauge for the Euro. An unexpectedly strong rise in inflation, particularly above the ECB’s 2% target, requires the central bank to raise interest rates to regain control of prices. When interest rates exceed those of its counterparts, the Euro generally benefits. Higher rates make the region a more attractive destination for global investors’ funds.

Economic indicators driving the Euro

The Euro can respond to economic releases that reveal the economy’s health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all steer the single currency. Economic strength supports the Euro by drawing in more foreign investment. It may also prompt the ECB to raise interest rates, directly strengthening the currency. Weak economic readings, by contrast, are likely to weigh on the Euro. Particular weight falls on data from Germany, France, Italy and Spain, the euro area’s four largest economies. Together, they represent 75% of the Eurozone’s economy.

Trade Balance and Euro demand

The Trade Balance is another key release for the Euro, showing the gap between a country’s export earnings and import spending over a specified period. Strong overseas demand for a country’s exports creates additional demand for its currency as foreign buyers seek to pay for those goods, lifting its value. A positive net Trade Balance therefore supports a currency, while a negative balance has the opposite effect.